South Africa’s GEPF pension fund ready to take a leap offshore
South Africa's Government Employees Pension Fund (GEPF), which was stung by Steinhoff’s share price collapse and whose asset manager, the PIC, is the subject of an ongoing judicial inquiry, wants to spread its investment wings.
GEPF’s chief executive, Abel Sithole, outlined the strategy to the commission of judicial inquiry in mid-July. By increasing investments outside South Africa it would aim to reduce the risk of overexposure to locally traded companies, while a stronger commitment to unlisted companies could help new industries and black-owned businesses, he said.
Should the fund follow through on its intentions the Johannesburg Stock Exchange (JSE) will feel the blow. Through the Public Investment Corporation (PIC), the GEPF’s vast multibillion-dollar investment war chest has been the mainstay on the bourse, with a diversified equities portfolio spanning stakes in financial services, media, property, retail and telecoms.
- “The PIC is the largest institutional investor in South African listed equities, controlling more than 10% of the market capitalisation of the JSE,” according to information on the PIC’s website.
- The GEPF makes up 87.12% of the funds managed by the PIC, according to information in the PIC’s 2018 annual report.
The PIC is wholly owned by the South African government and derives its investment mandates from its clients. That gives the GEPF considerable scope to influence investment direction, as the PIC’s largest, and most vocal, client.
In the 2017-18 financial year, which ran from 1 April 2017 to 31 March 2018, the PIC had R2.083trn ($150bn) of assets under management, making it one of the biggest asset managers on the continent. That is equivalent to almost half of South Africa’s GDP of R4.9trn, and double the country’s national budget of R1.8trn.
- Currently, the PIC’s offshore portfolio makes up less than 7% of its investments and includes global listed equities and global bonds.
- Investments into the rest of Africa make up 0.24% of the PIC’s portfolio and are listed as a subcategory of offshore investments. The most notable investments into the rest of the continent include $350m invested in Dangote Cement and R1.1bn in Vodacom Tanzania.
- Its domestic unlisted portfolio constitutes less than 10% of its investments.
In the period covered in its 2018 annual report, the PIC approved $876m for investment into the rest of Africa.
Ramos on the board
The asset manager is the subject of a judicial inquiry that aims to establish the causes of the governance problems that have engulfed it in recent years. It also experienced an exodus of executives and its board as a direct consequence of the controversy surrounding its investment decisions, specifically those on its unlisted portfolio.
The inquiry judge is expected to hand over a final report containing recommendations to President Cyril Ramaphosa at the end of July. In mid-July, finance minister Tito Mboweni announced the appointment of an interim PIC board that includes former Absa CEO Maria Ramos, who is a former director-general at the National Treasury and ex-head of Transnet, the state-owned freight, rail and ports operator.
The GEPF experienced significant losses when the Steinhoff share price went into meltdown. That costly episode sparked the ongoing conversation around managing risk through the GEPF’s offshore investment allowance.
The Steinhoff share price saga also prompted South Africa’s parliament to institute hearings that included representatives from the GEPF and unions, the PIC, and Steinhoff and JSE executives giving testimony before legislators to get to the bottom of the issue.
- Sithole confirmed that the GEPF is looking at investing more offshore. But, “no final decision has been taken in this regard”, he said. “In any case, it would be imprudent for the GEPF to provide comment on investments prior to making them,” he added without providing further details.
Adamus Stemmet, the spokesperson for the Association for Monitoring and Advocacy of Government Pensions, says the association agrees with the rationale to expand the GEPF’s offshore portfolio but is getting mixed messages and signals from the GEPF. “One day, it’s this story; the next day, it’s something else,” says Stemmet.
- “More should be invested overseas. At present, we are only given a 7% allowance for offshore investments. We think that is discrimination. We are pressing Abel Sithole and the GEPF to get the allowance increased, but the [finance] minister must approve it [first],” notes Stemmet.
It does not matter where the investment occurs as long as it is done in the interests of the fund, according to the association.
- Crucially, the investment should benefit members, and must not be used to bail out state-owned enterprises, such as Eskom or the South African Broadcasting Corporation. “Our attitude is that the members of the fund are its owners, not the government or the board of trustees of the GEPF,” says Stemmet.
Bottom line: The Steinhoff meltdown has been a wake-up call to the state pensions administrator, but changing its investment strategy will not be a quick or easy process.