In the search for returns, innovation will be key

Continued innovation in the African pension fund ecosystem will be critical to ensure investors are able to navigate the current challenging investment landscape.

Investors have faced myriad challenges over the last three years, with the Covid-19 pandemic, supply chain disruptions and inflation taking hold in both developed and emerging markets, as well as rising global interest rates and more recently the aggressive sell-off in popular growth markets such as US technology stocks.

With stagflation — inflation, benign economic activity and rising unemployment — also becoming a talking point for many markets, it is critical that pension fund managers have an array of tools at their disposal to respond to changing market conditions.

As a pension fund manager you would be asking yourself one key question: “How do I go about making sure we are not losing pensioners’ money?” In answer to this question pension fund managers need to focus on identifying a handful of key risks and opportunities.

The first and most obvious one is the relatively small investment universe African pension fund administrators are exposed to. Much has been made of the major delistings trend on the JSE and the restrictions that are imposed through Regulation 28 around offshore investment assets. Considering that the JSE and its associated debt markets are comfortably Africa’s most developed, one appreciates that the challenge is accentuated in other markets.

A quick look at the African Financial Markets Index (AFMI) shows that turnover figures across the continent are low as investors are in effect adopting a “buy-and-hold” strategy as they do not have sufficient tools to be more tactical with their asset allocation in the face of changing market conditions.

While there are clearly challenges, it is not all negative and one of the benefits of being a key financial services player in the continent is that we have been able to witness some positive developments. Botswana, for example, has made changes in its asset manager portfolio allocations to allow for investment in domestic assets, and Tanzania has recently passed new foreign exchange regulations that allow for investment in the Southern African Development Community without having to seek approval from the bank of Tanzania.

The African Exchanges Linkage Project is another exciting project driven by the African Securities Exchanges Association and the African Development Bank to facilitate cross-border trade in securities in Africa. This is expected to drive securities trade across a diverse range of countries, including Morocco, Egypt, Kenya, Nigeria, Mauritius and SA. These developments immediately drive increased liquidity.

In response to the asset allocation challenge we have been particularly excited about some of the innovations taking place in the alternative investment market, and the opportunities it presents. The commodity market — specifically gold — has been a popular choice for pension fund managers looking to hedge against both inflation and market volatility. Absa has one of the largest suites of exchange traded products (ETPs) in the precious metals space, and these are powerful tools for those looking for more tactical asset allocation.

Inflation-linked government bonds are another tool attracting a lot of attention from our clients. In a world where inflation is rising sharply at the same time as both equities and bonds are being sold off, these tools offer a combination of income and inflation hedging, with a high degree of security due to their sovereign backing.

The next opportunity that cannot be ignored is that presented by alternative investments which align with environmental, social & governance (ESG) metrics, or with the UN sustainable development goals — particularly for multinationals looking to participate in the lucrative SA commodity sector.

While there are opportunities for shorter-term, more tactical tools for African pension fund managers, we should not lose sight of the fact that pension funds by their nature are long-term investments, and managers need to be able to also think strategically about how they will deploy funds for long-term returns. This is where ESG-aligned tools become particularly important.

Absa has invested significant resources to create a suite of products which include affordable housing, renewable energy and green bonds which all offer unique investment tools for the longer-term manager looking at strategic asset allocation. We are already starting to see the benefits of investing in human capital who truly understand the nuances of the African market.

The African pension fund market faces a number of headwinds as it matures, but in all challenges there are also opportunities for innovators. Developments in the pension fund space will deliver the opportunity for better returns for savers and help build the domestic capital base. 

We are excited to be driving this innovation and believe we can deliver tools that will be of broad-based benefit to the African pension fund market in the coming years. Whatever challenges and opportunities the market presents, we believe we are ready for the ride.

Kirui is MD and head of global markets at Absa’s Africa regional operations. Mgwaba is head of ETP Business at Absa Corporate & Investment Banking.