Should the GEPF continue to put its eggs in one basket (The PIC)?
It has been well established in investments with concrete evidence that diversity is key in earning stable returns over time. Diversity refers to investing in a variety of assets or businesses that have different business/revenue models, perform differently in different economic cycles, are based in different areas/countries, etc. Diversity can also refer to how investment decisions are made, for instance, some investment managers might follow a Top-down approach whilst others do Bottom-Up analyses, most investment managers have their own investment philosophy (investment strategy) they follow that is different from others, some managers might be focused on a specific sector, like property, or specific investment industry, such as private equity, etc.
The Government Employees Pension Fund (GEPF) is the biggest pension fund administrator that manages and administer pension fund contributions and benefits on behalf of government employees in South Africa. In many different countries, the government is often the largest single employer and this is the case in South Africa as well. The GEPF is hence also the biggest pension fund administrator in the country with assets over R2 Trillion Rands (120 Billion US Dollars). The GEPF has solely given its investment mandate to the Public Investment Corporation (PIC) which is a state formed investment manager that manages investments on behalf of different government institutions that includes the GEPF, the Unemployment Insurance Fund, the Competition Commissioner Pension Fund and others.
The problem lies with the Public Investment Corporation (PIC), which lacks diversity in its investment decision making/strategy and its investment portfolio given its large assets under management. A very small portion of funds are invested in private equity while a proportionally large amount of its funds is on listed South African equities. The PIC is the most exposed single institutional investor to South African equities, it is the largest single investor in over 90% of all the listed companies on the Johannesburg Stock Exchange, which is South Africa’s main listing bourse (stock exchange). This leads to lack of diversity in its portfolio from a geographic diversity perspective since its ‘concentration risk’ on South African equities is very high, for instance, it was the largest institutional investor to lose more money on the Steinhoff fallout.
The ‘concentration risk’ can be argued with the fact that some of the listed companies don’t actually earn some of their revenue from South Africa, in fact, the largest market capitalization companies like Naspers (Prosus), Anglo American, Glencore, AB Inbev, Richemont and British American Tobacco earn most of their revenue globally. However, to put the ‘concentration risk’ to perspective, the South African financial market does not make up more than 1% of all the total investable financial markets (securities or assets) globally. The lack of diversity in the investment strategy or philosophy of the PIC is key to this concentration risk and the GEPF should consider allocating some of the funds to different investment managers, which is an industry wide accepted practice as demonstrated below when you compare the GEPF to other investment fund administrators in South Africa and its peers globally.
How does the GEPF compare to its peers in terms of allocating its funds?
Alexander Forbes, which is the largest private (non-government) pension and retirement fund administrator in the country, appoints different investment managers that follow different investment strategies to manage the funds for its clients. The managers they choose vary significantly, from hedge funds to small boutique and large investment managers. This strategy by Alexander Forbes ensures that their portfolio is well diversified in order to earn their clients the best returns possible.
Sygnia, which is a multi-asset manager that offers both active and passive investment with different Unit Trusts and ETFs, also appoints different investment managers to invest some of its funds. For instance, the Sygnia Equity Fund is spread between 60% passive and 40% active, and from the 40% that is actively managed, four different investment managers manage 10% each. Their criteria of selecting different investment managers ensures that their portfolio is well diversified as well.
In other Countries, the GEPF’s peers follow the same process of allocating some of its funds to be managed by different managers. As an example, the Government Institutions Pension Fund of Namibia appoints different investment managers with defined mandates to manage funds on its behalf. Saudi Arabia’s sovereign wealth fund is one of the leading investors in Softbank. In Norway, its Government Pension Fund, the largest in the world, has different divisions that manages its funds instead of having a sole investment manager.
It is clear that the GEPF is lacking behind in terms of industry standards when it comes to its investment strategy of selecting a sole investment manager to invest on its behalf and it goes against social and investment conviction of putting one’s eggs in different basket (diversity) to decrease risk. The GEPF should therefore consider allocating some of its funds to different investment managers in order to diversify its portfolio, particularly when you consider the recent governance issues at the PIC as well.
Disclaimer
The views expressed in this article are that of my own and do not represent the same views of any entities I am associated with.
The aforementioned fund managers are not mentioned as endorsements
