With a population that has a higher number of children and elderly, Zambia is left with not enough workers. Its dependency ratio leaves it vulnerable to taking on too much future debt, regardless of any post-default restructuring solution.
Africa’s largest pension fund changes tack
South Africa’s Government Employee Pension Fund (GEPF) will bolster its oversight of the Public Investment Corporation’s (PIC) investment mandate, while it cautiously invests in the rest of Africa.
The GEPF is vowing to improve corporate governance at PIC by using its considerable voting influence.
This comes after a bruising few years at PIC, which lost sizeable investments due to its exposure to Steinhoff, among others.
The GEPF has also reduced its exposure to AfriSam, Erin Energy, Independent Media, and the Lancaster Group.
Much is at stake
In early December, the GEPF released its annual report for the financial year, ending 31 March 2019.
- The GEPF’s total asset base (R1.82 trillion) represents almost half of South Africa’s pension industry, making it the biggest domestic investor.
- About 90% of the GEPF’s assets are invested in South Africa.
GEPF is Africa’s largest pension fund, and one of the largest in the world.
- Its asset allocation is spread across local equity (50%), local bonds (33%), local property (5%), local cash (4%), the rest of Africa (2%), international equity (5%) and international bonds (1%).
GEPF is exposed to most of the major listed firms on the Johannesburg Stock Exchange through its local equity portfolio. This makes it one of the most powerful pension funds in the country.
One of Africa’s biggest money managers, the PIC manages and invests GEPF’s funds.
Several scandals and allegations of corporate malfeasance have rocked PIC in recent years.
South Africa’s government also launched a ‘commission of inquiry’ into PIC to investigate its unlisted investment portfolio.
- “Due to the governance related developments/allegations that took place at the PIC over the fund’s reporting period and the subsequent termination of relationships between the PIC and its board, CEO and other senior members of management, we have increased our level of scrutiny of the financial reporting information produced by the PIC on behalf of the fund,” according to an auditor’s note in the GEPF report.
The GEPF’s auditors also raised their “professional scepticism” by inspecting the “signed investment mandate between the fund and the PIC” to ensure it complied with the agreed mandate.
GEPF’s Principal Executive Officer, Abel Sithole says in a normal environment, it is not wise for an asset allocator to give its agent a mandate, and then to interfere with that mandate on a regular basis.
- “The GEPF would not like to dictate to the PIC, but would like to have sight of what it is doing, and to be able to ask questions… Hopefully, that is not a permanent state of affairs. But, in time, when things have been settled and the PIC has returned to being what it should be, the scrutiny will not be as it currently has been,” says Sithole.
Sithole says the GEPF has a strong domestic bias because most of its returns come from the local economy. However, the fund has an appetite for more international investments.
The GEPF represents more than 1.2m government workers. It can invest up to 10% of its funds offshore, and a further 5% on the rest of the continent.
In contrast, private sector pension funds can invest up to 30% offshore and an additional 10% elsewhere on the continent.
The West Africa experience
Currently, GEPF has only invested 2% of its funds in the rest of Africa. Most of it is concentrated in West Africa, where the GEPF has largely had a bad experience.
Erin Energy, MTN Nigeria, and Ecobank were weak investments. On the other hand, Dangote Group has performed in line with GEPF’s expectations.
- “Everybody says we need to invest in the rest of Africa. We are looking for opportunities directly via the PIC, and other money managers like Harith, which is looking for other opportunities on the continent,” according to Sithole.
Diversification is key
GEPF plans to take more care and focus on due diligence when looking at the rest of the continent.
- “[Our exposure to the rest of the continent is small] not because there is a lack of willingness to invest or to commit. Unfortunately, where we have committed, there have been challenges… Maybe this indicates we have not done better due diligence. It does not necessarily indicate there is something wrong with the region. It might be a case of our approach. Our experience does make us cautious,” says Sithole.
Sithole believes there are no easy opportunities in the rest of Africa.
- “We are starting to look at East Africa as an alternative. That doesn’t mean we are deserting West Africa… We are diversifying. Diversifying within the continent might be part of how we manage the risk of exposure to particular countries and regions,” Sithole said.
Bottom line: The GEPF is reigning in its money manager – PIC – to protect the benefits of over a million government workers. It’s also increasing its exposure to investments in more countries by slowly diversifying its offshore portfolio.