Issue: September/November 2008


An avoidable void

Some high-profile exercises, affecting millions of savers, are underway. They have varying hallmarks of good intent and unpredictable consequence, but their common denominator is in lost opportunities to promote financial literacy on a mass scale.

Events that affect people’s pockets are inclined to grab their attention. When they do, special opportunities are presented to promote consumers’ financial literacy. Now evident is a pungent odour of opportunities squandered.

Take the proposed National Savings & Social Security Fund (NSSF), the share offers by Sasol and Vodacom to “the black public”, and the outbreak of hostilities over the level of “empowerment” share ownership in financial institutions. What they have in common is a dearth of pertinent information, intelligibly presented, to the predominantly unsophisticated markets most affected.

Where are the sorts of mass educational campaigns that helped people understand, for instance, the importance of voting (and how to vote) in the 1994 democratic elections or the subsequent conversions to share ownership (and what it meant) of Old Mutual and Sanlam? The proliferation of television and radio talk shows, or the distribution of information pamphlets, in user-friendly comic-style formats, which accompanied these initiatives and gave them an instructive context? Where, this time, is the public broadcaster.

Surely, the widest imaginable participation in plans for the NSSF is worth the effort. And not only this, which highlights the immediacy, for the subtext is in the imperatives for saving on which the national economy relies.

Unhappily, communication defects show late in the day. The consumer boom is exhausted and the capacity to save is sublimated to the contingency for paying off debt at much higher interest rates than when the debt was incurred. As a consequence, retirement funds are being raided with scant regard to the chagrin that must inevitably result.

Similarly, amidst the hype of the Sasol and Vodacom share offers to “the black public”, there’s a void. People who stand in long queues at post offices with their subscription payments rarely have access to financial advisers who can help them understand the prospectuses, rich in compliance detail.

Financial education is not the function of a prospectus. It’s the function of a much more exhaustive process. Without it, there’s more likely a sense that buying shares at a preferential rate is a safer gamble than entering the lotto; the difference that, in buying shares at a discount to a market price and being helped to pay for them, there’re prospects only for easy profit. It would speak powerfully for the state of consumer education in SA to suggest that the 300 000 applicants who subscribed for 200 shares or fewer in the Sasol offer had done so with a ready grasp of investment fundamentals.

For a prospectus to be of value to users, there has to be a basic understanding of the underlying concepts. In the absence of broader educational campaigns, it might be fanciful to assume that target markets for the Sasol and Vodacom offers are terribly aware of, say:

  • Money’s time value (for both offers have time restrictions on trading);
  • The effect of compound interest (on capital values over their respective lock-in periods);
  • Implications of vendor finance for dividends (even, perhaps, what the terms mean); or
  • Whether the investments are good for them relative to alternatives such as unit trusts, which offer the prudence of diversity (as opposed to the risk, were it explained, of a single share).

If the Sasol prospectus was complex, the Vodacom prospectus is a treat. Yet it doesn’t avoid the temptation to sell shares as it does airtime. “The transaction has been structured in such a way that every R2 500 invested will give you an exposure of R15 625 to Vodacom SA” makes it seem irresistible.

No share is without risk. By early August, the JSE all-share index had fallen by almost 11% from its January level. Sasol’s share price had dropped sharply from its earlier highs and is vulnerable to swings in the oil price. Vodacom shares are being offered in the South African operation, which has largely matured and is perhaps less exciting for growth than a while back.

In recent months, particular JSE sectors have been hammered. Some heavyweight financials have come perilously close to the prices at which their empowerment transactions were concluded. Current values have cut the comfort zones, leaving a lot less fat than when the shares seemed on an upwards-only trajectory.

Where are the sorts of mass educational campaigns that helped people understand, for instance, the importance of voting (and how to vote) in the 1994 democratic elections or the subsequent conversions to share ownership (and what it meant) of Old Mutual and Sanlam?

These transactions are still in-the-money, but less so. The lesson that share prices actually do fall is again being learned better than it has been taught. Easy profits are not as easy as once they seemed.

Neither are black economic empowerment (BEE) exercises themselves easy. Share investments of this nature are structured for the longer term, to entice new black investors, but in the process they come at a cost to existing shareholders. These shareholders aren’t all rich and, by number, they probably aren’t even predominantly white.

As TT has tub-thumped for ages, retirement funds are the most broadly based investment vehicles that exist. Frequently, they are the main if not the only repositories of black workers’ savings. There is no basis in equity for these workers to subsidise, let alone not benefit from, the various empowerment transactions.

As indirect shareholders through their pension funds, black workers are prejudiced because BEE dilutes the stakes in which their funds have invested. At the beginning of this year, for instance, pension and provident funds owned 33,8% of Sasol; growth funds and unit trusts held a further 22,7%. According to its 2008 annual report, the Public Investment Corporation (agent for the Government Employees Pension Fund) directly and indirectly held 12,9% of Telkom, which in turn owns 50% of Vodacom. Since the cost to Vodacom of its empowerment transaction will be about R2bn, go figure.

For an exercise intended to remedy past inequities, BEE is riddled with inequities of its own. Selection of beneficiaries is arbitrary, meaning some get windfalls while others don’t, while the sizes of windfalls varies as widely as the winds. Employees participate, or don’t participate, by chance of their employment. Communities benefit, or don’t benefit, by chance of their selection. Black members of retirement funds are forever ignored, despite an amendment to the BEE good-practice codes that allows for their inclusion.

And so on to the current dust-up between Cosatu and institutions that signed the Financial Sector Charter six years ago. It provides, among other things, that the institutions target a minimum 25% black ownership at holding company level by 2010. It also provides that, of the target, 10% has to be satisfied by direct ownership and there’s an incentive of scorecard bonus points if the 15% balance is direct. Otherwise, this balance may be satisfied by indirect ownership at group or subsidiary level.

Since Cosatu and the SA Communist Party want the 10% direct ownership increased to 15%, in line with the codes, it isn’t clear why they are so insistent. For one thing, the charter as it stands recognises the aspiration. For another, organised labour was party to its agreement.

The lesson that share prices actually do fall is again being learned better than it has been taught. Easy profits are not as easy as once they seemed.

If Cosatu had a mandate from its affiliates then, does it have a different mandate now? What are avowed communists seeking to achieve, as they reach closer the levers of government, apart from a fresh grab at capitalist lucre? Taking the charter as a whole, with its attendant obligations on the institutions, a higher percentage of direct black ownership will make an indiscernible difference to transformation.

Then there’s the fact that the major banks and insurers are already owned substantially by retirement funds that include black workers in huge numbers. Through trustees whom they elect to compile investment policies and appoint investment managers, they actually do have rights that they’re entitled as indirect shareholders to exercise.

Perhaps Cosatu can explain to these workers what it means for their savings when BEE shares are issued, to their exclusion, and ask them what they think. So far, it hasn’t happened. They’re left none the wiser, and impotent as ever, despite the pretence that consumers’ financial education has traction.