Still a long way to go from the first forays into empowerment
• Asset managers should be the net beneficiary of new voluntary retirement funds scorecard
Has the black economic empowerment (BEE) process — speeded up by the Financial Sector Charter — been a success? In fact, it was a process started about 10 years before the 2002 Financial Sector Summit, with the late Sanlam chairman Marinus Daling selling control of Metropolitan Life (Metlife) to a consortium headed by the respected physician and activist Nthato Motlana.
Of all the assets Sanlam owned, it made least sense to sell Metlife. Later Sanlam CEO Johan van Zyl said Daling had “sold the future” as Metlife operates in the growing mass market. There is no doubt that the consortium, later the listed New Africa Investments (Nail), would have taken an interest in other Sanlam-controlled businesses — Alexander Forbes was controlled by the Bellville giant at the time. The Sanlam-Nail deal set the template for BEE financial deals. It was closely replicated by Anglo American in its deal to cede control of African Life (Aflife) to Real Africa.
These deals certainly made headlines, but it was not long before many commentators changed the last letter of BEE from “empowerment” to “enrichment”. Having got to know the management of both Metlife and Aflife, I saw how bitterly disappointed they were that none of the new black controlling shareholders added value — for example, by facilitating access to new markets.
The Financial Sector Charter made the empowerment processes a lot more sophisticated than giving free share options to the politically well-connected — though that practice didn’t disappear altogether. I have been to a number of celebrations in recent years. Take Old Mutual; it had a big bash at the Sandton convention centre. It was at pains to cover all the organisations that benefited from the deal, so it was a looong evening.
It was not just about a broadgrinned Fred Robertson, chairman of Brimstone, who made a packet. Many shareholders have benefited, some have already cashed out. It is good to see Batho Bonke, led by Patrice Motsepe, continue the journey with Sanlam after its agreement matured. And it is also hedging its bets with some of the proceeds through the creation of financial services investor African Rainbow Capital.
There are still critics of the charter, which many historically white firms saw as the maximum targets they needed to achieve when they were intended to be minimum requirements — the ticket to the game.
Fatima Vawda. head of 27Four Investments, says the charter and the Department of Trade and Industry codes that supplement it have not led to full transformation. Only 5% of investment assets are managed by black-owned firms.
But she can see some change coming out of the new voluntary retirement funds scorecard, which will include the top 100 funds, including the large umbrella funds. It is retirement fund trustees who sit at the top of the food chain. But so far, they have not been required to play a part in the charter ecosystem.
The proposed retirement fund scorecard was introduced as part of the draft amended financial sector code. As a trustee, I cannot go through a window-dressing exercise that might harm the prospects of my members enjoying a safe retirement. We have avoided investing in even large independents such as Foord and Prudential, preferring very well-resourced businesses such as Allan Gray. It might be years before we look down the scale at shops such as Kagiso or Argon.
Retirement funds will be expected to measure themselves annually against certain aspects of the broad-based empowerment scorecard, namely for preferential procurement and management control. There should be regular reporting on the proportion of liabilities attributable to black men and black women. This is a proxy for ownership, as a retirement fund is analogous to a mutual society. This is similar to the profit share account at PPS.
The code encourages approved training for trustees, office bearers and principal officers. Skills development does not contribute to the retirement fund scorecard. There are 20 points for the retirement funds in the management control, which focuses on black trustees. senior management and principal officers.
The preferential procurement scorecard is more complex. Out of 80 points, 35 are for procurement spend on BEE suppliers, 25 are for empowerment procurement from BEE suppliers that are at least 51% black-owned, a further 10 are for supporting qualified small investors or emerging enterprises and the last 10 for suppliers that are least 30%-owned by black women. Since there are no black-owned providers of risk cover, or many black consulting firms, asset managers should be the net beneficiary of the scorecard.
Isaw some good investment advice from Andrew Headley, who runs the Nedgroup Global Equity Fund. Headley, who works for UK-based Veritas, says we have to cope with the reality of an extended bull market. It is entering its ninth year globally and valuations are extended. Identifying companies with strong and sustainable competitive advantages — which is what all good active fund managers should be doing — is becoming increasingly difficult.
Headley says that if opportunities are not available at the right price, Veritas will remain patient. This could mean not keeping up with the benchmark in the short term. But over the long term, it should help to deliver strong absolute and relative performance over the full investment cycle.
Veritas has made some quirky picks, one of which is the pharmaceutical group Allergan. It has some blockbuster drugs but the investment thesis is based on just one, Botox. This favourite wrinkle remover is widely used in cosmetic treatments, but increasingly, has been applied in medicine.
Botox works by locally and temporarily paralysing muscles. It has proved effective in treating chronic migraines. Allergan hopes Botox could even soon be used for depression, which is great news for shareholders as it is a common condition that is never fully cured.
I never thought I would read a fund manager referring to something called the facial feedback hypothesis. If the patient is predisposed to frowning, Allergan wants to know if paralysing the muscle that allows people to frown will lead to a reduction in depression.
WE HAVE TO COPE WITH THE REALITY OF AN EXTENDED BULL MARKET. IT IS ENTERING ITS NINTH YEAR GLOBALLY