BUSINESS DAY TV: Traditional assets still win out in SA — but that could be about to change
Gyongyi King is deputy chief investment officer at Investment Solutions.
Business Day TV: With a low return environment from traditional investments, one would expect investors to be expanding their horizons, but despite Regulation 28 being amended five years ago, only 2.3% of pension funds are invested in alternative assets. We spoke to Gyongyi King, deputy chief investment officer at Investment Solutions, about why the uptake of alternative investments has been minimal.
GyongYi King: What we’ve seen in SA is an environment where your traditional asset classes have done very well for you. So as an investor, thinking about the complexity outside of those traditional investments towards alternatives has really not been compelling for investors. So what they’ve done is they’ve stuck to their traditional investments, they have done very well, but as you’ve pointed out, in the past year or so we haven’t seen the returns we’ve come to expect from equities. The bond market has done pretty well but we haven’t seen a great environment for traditional assets overall. So what we’re seeing now is investors are looking towards those asset classes, and we should see that 2% gradually creeping up in the next few years.
BDTV: Are you already seeing that shift?
GK: We’re certainly seeing more interest. I don’t think we’ve seen more investment at the moment and really that’s because people have never invested in these asset classes before, even at 2% it’s pretty concentrated from an investor perspective. So now they still have to look at the investments, evaluate them, try to understand how it fits into their portfolios overall, where they disinvest from to get the assets to invest in the alternative sector, so we’re seeing a lot of interest but not a lot of investments yet.
BDTV: What are we talking about here … hedge funds, private equity — what else would be included in that alternatives basket?
GK: Well alternatives is not really well defined in Regulation 28 for instance which governs retirement funds. It just calls it "other", and it really is the basket …
BDTV: Anything else …
GK: … of all other investments. Exactly … all other investments that you could possibly invest in outside of the traditional asset classes. So this could include commodities, it could include all private markets, so not just private equity but also private credit, lending, there’s a whole array of investments that are set out there in this other or alternative investments.
BDTV: Do you think it’s just too frightening for South Africans to go into some spaces that may not be regulated, though hedge funds are now regulated so it should be a more comfortable space to invest in.
GK: That’s exactly the dichotomy in the sense that the hedge funds have always been the look to for investment if you’re looking at alternatives. They are now regulated, so they are a more attractive asset class and they also bring with them the element of liquidity. All the other alternative asset classes we normally look at have an element of illiquidity and that does frighten investors because after the global financial crisis in 2008, investors came to see the great premium in the liquidity and when you look at alternative investments, one of the things you are being paid for is to take that liquidity risk or that liquidity premium. I think investors are a bit nervous of it, but as they get to understand the benefits of these asset classes, they should reduce their fears.
BDTV: So what are those benefits?
GK: So I mean it is wide ranging, but the one key one that we’re looking for — and we certainly look for in Investment Solutions — is alternative investments uncorrelated to the traditional asset classes. We are looking for investments that don’t require the equity market to perform well or any other traditional asset classes for that matter to perform well such as property, that they will generate returns for investors outside of those market movements. That can be anything from infrastructure investment, hedge funds for instance are exactly designed to do that and a number of other different types of asset classes look to perform outside of what we would call market performance.
BDTV: So with the risk premium like liquidity that you talk about, is the reward commensurate?
GK: It depends on each asset class and really that’s about evaluating the investment, evaluating investment expertise of however you were investing into the asset class and that’s all going to come to way when you think about the return premium. Historically, when you look at international studies, certainly there is a premium that you can extract from all these asset classes and if you look at private equity, for instance, it’s quite well documented, but even in private equity, it depends on what year you make your investment, who you invest with and what they’re actually doing. So it’s always specific in investments, it’s very hard to make a generic statement, but if you look at the studies globally, there certainly is a premium but you just have to be selective.
BDTV: I suppose as private equity you can work out what the returns are because you’re go in at a certain stage when they find the exit that’s investment you get your returns. Any ideas of gauging, how to you gauge how well those other asset classes have done because there is no single benchmark for them?
GK: It’s difficult and this is another thing that’s prevented a lot of investors from looking at these asset classes in the past because one thing most investors globally, and certainly in SA, value is a benchmark, and none of these have that. They’re normally unique investments looking one specific area of the market, or one specific area of the economy for instance, you have to evaluate every single one independently.
The way that we evaluate when we’re looking at the performance and whether they’re doing well or badly is whether the risks are being taken and certainly the reward that’s coming from those risks were commensurate with what we were promised at the beginning of the investment.
There are certain asset classes that have big assets behind them, such as infrastructure, so that gives you a risk underpin if you like, and then you get return streams out of that that can be inflation linked.
© Business Day 2016