Prescribed assets and passive funds preoccupy asset managers
Government's plan will be deficient if it forces pension funds to invest in asset classes that are are not profitable or do not have the right risk profile, says chief economist
The increasing allocation to passive funds, a squeeze on active management fees and uncertainty about whether the government will follow through on the ANC’s plan to look into prescribed assets is keeping SA asset managers on their toes, says Alexander Forbes.
The country’s largest pension fund administrator said it does not think the idea of prescribed assets in its current form will be pursued by the government.
“It’s not a government process yet. The moment it becomes a government process, then we’ll engage. But it’s a long-term risk and a low-probability event,” said Isaah Mhlanga, executive chief economist at Alexander Forbes Investments.
Mhlanga said prescription will be bad if it forces pension funds to invest in asset classes that are not profitable or do not have the right risk profile. It will make it difficult for asset managers to protect investors’ money. He said Regulation 28, which prescribes how much of pension fund assets can be allocated to different asset classes is already a nudgein the right direction and the industry is not resistant to investing in infrastructure, as long as the risk and return profile of projects will not put workers’ ability to retire comfortably at risk.
Gyongyi King, Alexander Forbes Investments’ chief investment officer, said the migration from defined benefits to defined contributions in the SA retirement system makes it difficult to venture into unlisted asset classes. However, she believes pension funds should be encouraged rather than instructed to invest in alternative assets.
“A lot of the creativity that happened in the unlisted space [was] driven by credits. It wasn’t prescribed. Companies like Old Mutual went into social housing, taxi finance etc. The industry was able to come up with innovative models that actually generated good returns.
"But it’s very different when there’s an instruction to invest in the public healthcare scheme or other initiatives that are not well managed. It could lead to poor retirement outcomes for defined contribution fund members,” King said.
While data from Boston Consulting shows that the share of alternative asset classes has increased from 9% in 2003 to 15% in 2017, SA pension funds and asset managers are allocating far less of their assets to alternatives. Riscura data shows that only 2% of SA’s pension funds assets are invested in alternatives compared with the world average of about 25%.
Alexander Forbes expects alternatives to grow as they offer higher returns to compensate for their lack of liquidity. Based on the global trend, the administrator also expects passive equity funds to grow at the expense of active managers, especially when smart beta becomes mainstream since it replicates returns achieved by active managers, but at a lower cost. It said the fee for smart beta equity fund is on average 15 basis points lower than that of active equity funds.
Active managers globally have underperformed their benchmark over 10 years for two consecutive years.
Lebo Thubisi, head of manager research at Alexander Forbes, said the environment is ripe for active managers to thrive as many JSE stocks have fallen from their record highs.