The Eskom Pension and Provident Fund (EPPF), which oversees about R170bn in assets under management, aims to invest more in “real assets” ranging from digital infrastructure to renewable energy projects, as it seeks out inflation-beating returns that also deliver a positive socioeconomic impact.
As a defined benefit pension fund the EPPF has the difficult task of ensuring it generates sufficient returns to deliver retirement benefits to about 81,200 past and present Eskom employees until at least 2092. To achieve that it has to strike a balance between chasing returns that can beat inflation for the next 70 years while still retaining a prudent asset allocation framework that does not imperil its capital.
The man tasked with overseeing this complex task is 43-year-old chief investment officer Ndabe Mkhize, whose youthful appearance is betrayed only by the silver flecks in his hair. A chartered financial analyst and CAIA charterholder with an actuarial background, he boasts a wealth of investment experience that spans asset management heavyweights ranging from Old Mutual to Prudential, Coronation and Stanlib.
Having left the private sector to join the EPPF in 2014 because he wanted to “do more than just manage money”, he says he sees an opportunity to help enable SA’s recovery from Covid-19 through greater infrastructure investment while simultaneously generating strong returns for his investor base.
“We like real assets because they have long-dated cash flows and stable returns and when we invest in them it actually stimulates the economy,” he says. “In the past it was about risk and return but going forward investments must incorporate risk, return and impact. This takes investments into a three-dimensional picture.”
Job creation
To deliver on this impact mandate Mkhize says the EPPF is looking to increase its exposure to private markets to about 13% of its assets under management (AUM). This allocation will gradually increase when the funds already earmarked for private markets are committed to and invested in actual assets. In the realm of the EPPF private markets refer to non-listed assets that span private equity, real assets (such as tangible infrastructure ranging from toll roads and port projects to ICT infrastructure), all the way to developmental impact funds that deliver a social and financial return.
“Going forward in private markets we are more likely to deploy capital into real assets,” he says. “Impact is brought to bear by the job creation that you spur when you invest in these real infrastructure assets. It’s also aligned with the economic recovery from Covid-19.”
Mkhize says the EPPF follows a very robust investment methodology that is informed by an asset liability management framework, which seeks to match the fund’s long-term liabilities with the returns required to cover them. That process has helped the EPPF achieve a funding ratio of 135%, which means that when all retirement liabilities are taken into account as well as contingency reserves the fund still has a 35% surplus to cushion it against potential shocks.
“That obviously depends on what the financial markets do and it does fluctuate,” he says. “It can be as low as 6% or as high as 35%. But we’re hoping it’s going to remain range bound.”
While the EPPF manages a substantial portion of its AUM in-house, about two-thirds is overseen by external providers such as Ninety One, Coronation, Kagiso and Mazi Capital while the fund’s entire offshore allocation is managed by international asset managers such as BlackRock, Morgan Stanley Investment Management, Veritas, Carlyle and UBS.
That allows it to achieve a well-diversified portfolio construction that aims to keep its long-term asset allocation divvied up between domestic equities (37%), inflation-linked bonds (14%), listed property (7%), nominal bonds (5%), domestic cash (2%), global developed markets (21%), global emerging markets (6%), the rest of Africa (5%) and onshore Chinese securities (3%).
“As a private pension fund we do not have the backing of government so we have to ensure we can create a surplus to meet our liabilities,” says Mkhize. “That’s why we want assets that are in the real infrastructure and property space because they tend to be inflation hedging. They give you predictable but high returns and have long-dated cash flows that can be used to match one’s liabilities.”
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