Diversify, but do so warily

With all the revelations or allegations about the Public Investment Corporation’s (PIC’s) governance failures emerging at the Mpati commission, now might not have been the best time for its biggest client to make a pitch for investing in unlisted vehicles. But that doesn’t necessarily mean it’s a bad idea.

The Government Employees Pension Fund (GEPF) holds about R2-trillion of assets on behalf of state workers and has a fiduciary duty to those people, and taxpayers in general, who ultimately guarantee the defined benefit fund. Any move governed by clear and strictly enforced rules that improves its performance are in everybody’s best interest.

With the JSE having, in 2018, posted its biggest decline since the outbreak of the financial crisis, it’s only natural that the fund, which is also lobbying the government to allow it to take more of its significant investment war chest offshore, to seek ways to improve its investment returns.

The complication comes in when one considers that the bulk of its money is invested by the PIC, which is mired in scandal. The Mpati commission has already brought to light a number of ethically dubious dealings, even if nobody has yet been accused, let alone convicted, of a crime.

So it wouldn’t be a surprise if GEPF principal investment officer Abel Sithole’s desire to have the fund invest more of its cash in unlisted companies is greeted with scepticism.

If you take away the R4.3bn investment in Ayo Technologies in 2017 at a seemingly inflated valuation, most of the controversy has been around unlisted companies, where there is less transparency. One of the deals to come under the spotlight at the commission was the PIC’s R2bn investment in Iqbal Survé’s Independent News and Media. That saw it impair about R1bn in loans granted as part of that deal.

Sithole noted that the “unlisted space” is “very small in the scheme of things”. Yet it was in relation to that tiny space, about 5% of the GEPF’s portfolio, that most questions were raised at the commission.

“My wish is that whatever the commission finds, we don’t do away with unlisted investments but that we do more and do it correctly,” Sithole said, adding it would be good for the economy.

That would be all good and well. The PIC has in the past come under scrutiny for a perceived lack of transparency. It would be hard to support a move that allowed the GEPF fund to commit more to that “unlisted space” if that wasn’t accompanied by full and immediate disclosure of the recipients.

Allowing the fund to invest more offshore should be less controversial, and it’s surprising that talks with the Treasury have gone on for as long as they have. It doesn’t make sense that government employees are prejudiced in relation to workers in the private sector, whose pension funds can invest as much as 30% of their assets offshore.

The anomaly means the GEPF, which is only allowed to move 10% of its assets to offshore markets, has most of its exposure in SA, with more than half of that in listed equities.

The JSE fell 11.4% in 2018, almost double the 6.2% drop in the S&P 500. Converted into rand, that performance by the US index turns into a gain of almost 9%. Although the GEPF did well to earn an 8.5% return over 2018 in a stagnant economy, the benefits of diversification is obvious.

So the arguments for spreading the risk and making more of its money work in overseas markets would seem to be viable if an alternative is sought.

On the drive towards the world of unlisted markets the jury is still out. It would be a wise approach to wait for the commission to do its work and make recommendations on improving governance structures. Only when that is done should the GEPF, working through the PIC, be allowed to shift more of its portfolio into the unlisted space.

THE GEPF SHOULD WAIT FOR THE PIC TO BE SORTED OUT BEFORE TAKING STEPS TO INVEST ELSEWHERE