Prescribed assets: Too soon to panic -
The onslaught of commercially and politically expedient news stories, detailing the potential consequences of prescribed assets, is causing some local investors to make fear-based decisions instead of sticking to rational, fact-based portfolio strategies.
Prescribed assets are investments that an investor is legally forced to make due to government regulation within a retirement investment product. They are not a new concept to South Africans. In the 1970s and 1980s, the Nationalist government legislated prescribed assets within pension funds, before abolishing them in 1989.
In recent months, prescribed assets have been the subject of much debate, after the ANC tabled an investigation into the introduction of prescribed assets as part of its 2019 election manifesto.
The ANC’s manifesto stated that it will “investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework”.
President Cyril Ramaphosa, in response to a direct question on the matter, recently asserted that a discussion was needed with the retirement fund industry to explore investments for development and infrastructure purposes.
The national dialogue became even more heated recently, with Enoch Godongwana, the head of the ANC's economic transformation subcommittee, reportedly stating that the asset management industry is sitting on R6 trillion under management and should lend some of this to the state. His argument was that this is a better approach than looking to the International Monetary Fund or World Bank for a bailout.
Today, prescribed assets are only a hypothesis. No clear plan has been put forward with regards to a discussion on them, let alone how and when they would be implemented. If they were to be implemented, there is no indication as to what form they would take. As a result, it is impossible to quantify the impact on investor portfolios.
While GTC is not in favour of any government dictating which assets an investor has to invest in, it is possible that prescribed assets may not result in a detraction of investor returns. There are examples of efficiently-managed private and public partnered investments, which yield attractive returns, that would meet the government's criteria of enabling social and economic development. That said, we cannot rule out the risk of a sub-optimal investment return.
It’s also important to note that historical research indicates that the last time South Africa had a regime of prescribed assets, the resultant investment returns were lower than those from other investments.
We recognise the urgent need to focus South Africa's resources for economic and social progress, although we believe that a light touch from government - with business and investment markets doing the bulk of the heavy lifting - is the best approach.
The best action to take in response to the prescribed assets debate is to maintain your current investment strategy. Indeed, any action taken at this stage would primarily be based on fear, which is a detractor of investment performance.
Clive Eggers is the head of investment analytics at GTC.