It would have been so much simpler to use benign phrases such as “socially responsible investments” or “developmental assets”. Instead the ANC has raised the highly anachronistic concept of prescribed assets.
Charles de Kock, who now runs absolute return funds at Coronation, joined Old Mutual in 1986 when the old prescribed assets regime operated. It forced pension funds to invest 53% of their new cash flows into either cash or gilts (the old name for government and parastatal bonds). But it never mandated investment in a specific project or organisation.
There was a hothouse effect, as no funds could (legally) be taken offshore at that time so equity prices were still high, especially for shares with rand hedges such as Liberty (which included the Liberty Internatiional UK property business and British insurer Sun Life) and Rembrandt, which controlled Rothmans internationally before its overseas holdings were rehoused in Richemont. These two shares often traded on a price:earnings (p:e) ratio of 30 plus.
De Kock says diamond giant De Beers was perhaps the bluest of the blue chips then, but fund managers were reluctant to sell it. If they had bought it for R40 and sold it for R340 the R300 would be counted as a cash inflow, and 53% would have to be reinvested in gilts. It is not surprising that most fund managers rarely traded shares — R50m was a good day’s trade in the 1980s, now R2bn of trade is quite routine.
Meanwhile prescribed assets (when de Kock’s father Gerhard was governor of the Reserve Bank) led to excessive demand for government bonds, and subinflation yields. De Kock says in the much freer environment of 2019 Coronation doesn’t need any prescription to buy government bonds as they offer good value. But he is avoiding Eskom bonds as its strained balance sheet makes its ability to pay coupons tough. In any case the old prescribed assets wouldn’t make much difference if you are in De Kock’s conservative portfolios, which cannot invest more than 40% in equities.
The National Party’s approach distorted the market and provided cheap finance to an illegitimate regime — especially after the 1985 debt standstill. Perhaps we should be more sympathetic to the intentions of the current government, which talks of benefiting the real economy by earmarking money for worthy causes such as rural development. In the 1990s prescribed assets was replaced by regulation 28 of the Pension Fund Act. This does not prescribe minimum holdings but puts limits as a basic risk management framework. Like celery and cabbage in a diet there is no limit to the amount of cash or bonds, but 75% on equity and 10% on hedge funds.
The preamble says “a fund has a fiduciary duty to act in the best interests of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities”.
It is tempting to see fund management houses as fat cats that won’t miss a few assets here and there — what’s R20bn to R300bn to a R4-trillion industry? But it is not their money. As Association for Savings and Investment SA (Asisa) head Leon Campher says, behind very rand invested is an ID number.
Andrew Canter, chief investment officer of Futuregrowth, says prescribed assets would make his own shop extremely rich. With an unmatched 25 year record in developmental assets it could gather another R50bn on top of its R185bn almost overnight. “But we would then end up throwing money at projects and sectors for the sake of it. The private sector has demonstrated that when an investment case is well made it is happy to invest. Just look at the R200bn invested in renewable energy projects.”
He says the choice of projects becomes a political football: politicians decided arbitrarily that toll roads were not a development asset, for example. Canter says the government and its agents, such as the Industrial Development Corporation and Development Bank of Southern Africa have substantial budgets to facilitate national development and ordinary pensioners are not responsible for this other than through the normal capital investment process. For some larger funds this might mean partnering with development finance institutions, provided that the fund has full discretion on the choice of project.
There are certainly issues of common ground between retirement funds and the government. Pension funds should increase their exposure to unlisted investments and managers such as Futuregrowth have proved strong returns are available from doing good. Private equity funds should also have a dialogue with the government’s economic cluster to look for ways they can combine supporting entrepreneurs in the real economy with good total returns.
A couple of issues should be nonnegotiable for the pensions industry, in which I play a small part as a trustee. It cannot be compulsory to invest in specific enterprises such as Eskom and SA Airways, for obvious reasons — the risks hugely outweigh the possible return. The other would be to in effect “tax” the funds by making them hand over, say 15% of their assets to a centralised manager such as the Public Investment Corporation, instead of investing it through the chosen asset managers who run the portfolio.
Futuregrowth believes prescribed assets amounts to theft and has chatted informally with some attornees. If money is taken away for prescribed assets in a “tax” then they have a point. Let’s hope such a confrontation is not necessary.
• Cranston is Financial Mail associate editor.
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