STEPHEN CRANSTON: One board is quite enough for the PIC and the GEPF
The time is long overdue to merge the Public Investment Corporation (PIC) with the Government Employees Pension Fund (GEPF). When I once wrote a centenary survey on the PIC nobody could decide who should speak on investments, so I had a joint interview with Dan Matjila from the PIC and John Oliphant from the GEPF. It was clear that Oliphant’s function was confined to the (important) role of asset and liability matching — as well as his Billy Graham-style crusade for responsible investing. He wouldn’t have been consulted on anything so trivial as a R4bn investment in a technology company.
The best way to ensure the GEPF takes full responsibility and has full oversight is to let it become its own asset manager along the lines of CalPers, the California retirement scheme. This makes the process of hiring and firing managers much faster. It recently reduced the number of “emerging” managers (its inverted commas not mine) it hires from five to one. The PIC would never act so quickly as it treats its emerging manager programme as some kind of social service.
Why do we need separate boards of trustees both funded by the taxpayer when one will do? It is also time that the guarantee for GEPF members disappeared. This enables it to be one of the last defined benefit funds in the country. Civil servants know what pension they are going to get based on their final salary and length of service, courtesy of the taxpayer. The rest of us depend on the growth we can get from the financial markets.
It might do a lot of good if it opened up a range of investment choices across the market. The returns they currently get from the PIC essentially are the market. It is by far the largest investor in both the SA equity and bond markets. Listed assets make up 94% of the portfolio and just 8% is invested offshore. If the fund adopted a defined contribution model you can be sure there would be pressure to diversify more globally. Yet for political reasons the focus is on Africa, with a further $275m now going that way.
When the PIC steps outside the listed space it has rarely been a success. Just 45% of its unlisted assets in the Isibaya fund are performing. There is an internal rate of return of just 1.87%, compared with a target of 8%. Under the CalPers model this portfolio would have been moved to another subadviser years ago. Even if it had been run in-house they would have had the maturity to raise the white flag.
The only part of the unlisted assets that makes sense is the investment into unlisted property. The PIC certainly has a mixed portfolio, ranging from the bustling (well, normally anyway) V&A Waterfront to the desolate, forlorn Athol Square in Sandton. But a further R1.3bn into property, at today’s prices makes sense.
The PIC boasts that the returns for the GEPF were in line with expectations while smaller clients such as the Unemployment Insurance Fund (UIF) and Compensation Commission were ahead. As a GEPF member would I be happy to see more effort being put into the smaller portfolios? Over the long term the GEPF should consider terminating its mandate with the PIC and investing in index funds. Over 10 years its return of 7.59% is a paltry 0.09% ahead of the benchmark. And the PIC generates a nice R189m profit to do this.
It is also a worse return over 10 years than the worst of the Alexander Forbes Large Manager Watch — 8.8% from Absa Asset Management — and well below the best performer Coronation on 11.1%. So the case for getting rid of the PIC middle man gets even stronger. It has clearly not served its clients well in the Isibaya fiasco, and its returns from listed assets have been mediocre.
But the PIC has always been a nice place to be “deployed”. When he was CEO Brian Molefe loved the power in the role, at least until his wings were clipped when a full board of the GEPF was elected. Yet even this board seems to have given Dan Matjila a great deal of latitude. Incredibly, he was allowed to be both CEO and chief investment officer.
Of course an elephant can only be eaten one bite at a time. Once the GEPF has taken unambiguous control of asset allocation and manager selection it would be disruptive if it increased its international allocation from 8% to 30% immediately. It would have to debate whether it is worthwhile investing in domestic hedge funds given that even if it owned the entire industry it wouldn’t move the needle. But both investment returns and governance would improve in a merged organisation.
• Cranston is a Financial Mail associate editor.
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