The government is looking at introducing prescribed assets for retirement funds, forcing them to invest a portion of their assets in national infrastructure and social development. But asset and pension fund managers say that impact investing is a better option.
Their challenge is the lack of suitable projects. “Show us well-run enterprises, and the capital will flow,” they say.
“Prescription is presented as a means of promoting development,” says Andrew Canter, chief investment officer at Futuregrowth Asset Management. “Don’t fall for it. Prescription is about accessing money for badly run enterprises that demonstrate malfeasance, corruption, fraud and inefficiency and that cannot access money from the private sector as a result.”
Attractive assets do not need to be prescribed, says Janina Slawski, principal investment consultant at Alexander Forbes Investments. “The implication of prescription is that the assets are not sufficiently attractive for voluntary investment.”
For members of the Association for Savings and Investment South Africa, forced investment in low-yielding or high-risk projects removes the incentive to perform, and diverts funding from deserving projects that would drive growth and create sustainable employment.
Canter contends that prescription challenges clauses in the Bill of Rights, specifically those relating to property rights and social security.
“Should the government tell you to shop at Shoprite rather than Pick n Pay, or to invest in this and not that? Of course not. The way we choose to spend and invest our money is a property-rights issue.”
Also, prescription would undermine pension fund returns and increase pension fund risk, undermining social security.
As it is, South Africans are not saving enough for retirement. The potential reduction in investment returns, leaving members poorer, counters positive changes achieved through retirement reform initiatives, says Slawski. She estimates that if prescribed assets were introduced, benefits for defined-contribution pension fund members could be up to 14% less than expected (assuming 1% reduction in returns, on 14% contribution rate, over 40 years).
A further concerning consequence of prescription focused on struggling state-owned enterprises (SOEs) is that retirement fund members may limit contributions - to the detriment of themselves, the funds and government, says Andrew Davison, head of advice at Old Mutual Corporate Consultants.
Because of the potential price distortions and poor returns prescription creates, a much better way to support developmental and sustainability objectives is to encourage pension funds to incorporate environmental, social and governance into investment strategies and allocate assets to impact investments, says Davison.
Slawski offers a continuum of scenarios:
“Bad” - prescribed investment into unattractive SOE bonds.
“Not-so-bad” - prescribed investment into specified developmental assets.
“Great” - positive incentives to invest into unspecified developmental assets, which “generally lead to positive investment outcomes - for investors and communities”.
Developmental (or impact) investments include affordable housing, agriculture, Small, medium and micro enterprises finance, and renewable energy, water, telecommunications and transport infrastructure - all of which contribute to a sustainable national economy, says Angelique Kalam, manager of sustainable investment practices at Futuregrowth.
The goal of developmental (or impact) investing is to make a measurable positive social, economic, or environmental impact - while also generating financial returns.
“Futuregrowth has proved - as have others - that this is possible,” says Canter. “We have a 24-year track record of doing this. Our Infrastructure & Development Bond Fund outperformed its benchmark (All Bond Index) over the long term.”
Chaired by Elias Masilela, the Impact Investing National Task Force (including asset managers and pension funds) was launched last year to accelerate capital deployment to optimise financial, social and environmental returns. Masilela said impact investing could help tackle the imbalances that characterise and threaten to destabilise our country.
“There is no shortage of money or will to invest in the development of the country,” says Canter. “The presumption that we won’t do it unless compelled to is a falsehood.”
WHERE MANAGERS ARE INVESTING FOR IMPACT
According to the 2017 Investing for Impact Barometer, 63% of funds used an impact investment strategy.
So where are the fund managers seeing investment opportunities?
Government’s Renewable Energy Independent Power Producer Procurement programme. “Over R200billion was mobilised in eight years to build dozens of alternative energy plants sustainably, commercially, within proper legal frameworks, that produce clean energy,” says Canter. According to the Department of Energy, renewable energy power producers have created 38701 “job years” for youth and women from surrounding communities.
Pension funds under Alexander Forbes’s management have significant allocations to government and parastatal bonds related to infrastructure and development. AF Investments launched a developmental impact multi-asset fund, Sakhisizwe, in 2005, and a Private Markets capability in 2017, with major allocations to underlying developmental assets.
Futuregrowth has R44bn invested in infrastructure and developmental assets on behalf of pension fund clients, which include most of the top 50 pension funds, says Kalam. “Our flagship Infrastructure & Development Bond Fund, which aims to make investments that facilitate infrastructural, social, environmental and economic development in South Africa, has been running since January 1995.
“This fund houses the SA Taxi transaction, which has provided more than R21bn in loans to the taxi industry over the past 10 years. It has also contributed to the creation of about 130000 direct and 220000 indirect jobs during this period for drivers, rank managers and service providers.”
At Sanlam Investments Alternatives, “the most high profile impact investment has been through Climate Fund Managers (CFM), the joint venture between Sanlam InfraWorks and the Dutch Development Bank, FMO”, says Todd Micklethwaite, head of distribution.
“The debut vehicle managed by CFM is the innovative, acclaimed blended finance facility, Climate Investor One, a global climate fund mandated to invest in clean energy projects in emerging markets.
“Also, our South African private debt fund focuses on financing entrepreneurs and commercially viable businesses that are well positioned to address some of South Africa’s most pressing challenges, through job creation, supporting economic development and improving conditions for vulnerable sections of society.
“An upcoming addition to our impact pillar is the Affordable Housing Fund, to develop clean, safe and habitable communities for those disadvantaged by the legacy of apartheid.”