GRAVY: Editorials: Edition: September / November 2020

President Cyril Ramaphosa keeps mentioning that Covid-19 has created a “silver lining” for the economy.

As the Afrikaans poet Langenhoven once pointed out, however, behind every silver lining there’s a dark cloud.

What a dreadful

misunderstanding there’d been over Lockdown 3. Most of us thought that attendance at night clubs, sports grounds, beaches and

bars etc was disallowed. But not those of use who believe what we read in the Government Gazette. According to the edition No 43476, where the amended regulations were published, attendance at such venues was allowed. They’re specifically listed as exceptions to the places prohibited.

Either that or the drafter of the regulation didn’t know about double negatives. In which case anybody arrested under s5(a) would have enjoyed a watertight defence under s5(b).

SARS commissioner Edward

Kieswetter wants additional resources to deal with tax evasion related to Covid-19. Give them to him! Hardly can there be an investment likely to generate a better return.

In fact, the resources shouldn’t be confined to hitting only Covid- 19 corruption. Rather give him everything he needs to have a full go at the proceeds of all corruption. Start with lifestyle audits. Then claim the tax. Next, let the Asset Forfeiture Unit get to work. And afterwards follow the process that worked so well in nailing Al Capone. The more the merrier if a few extradition treaties were simultaneously triggered too. Not only would justice be served and the fiscus replenished but, in my view, the rand would quickly turn north. Might even help to stave off the IMF, depending on what certain ANC leaders would prefer.

On the subject of tax, one wonders whether the R60m or so in fringe benefits will ever be claimed from the owner of Nkandla. He’d say that the constant reminders are politically motivated.

Of course they aren’t.

The way things look, best prospects for economic growth will be in the Far East. It means that SA asset managers will need to pay close attention particularly to China. But a few posers will include whether:

a) Returns on local investments, including infrastructure, will need to be benchmarked against them;

b) Adherence to ESG policies can apply there as here.

A recent study has found that women who carry a little extra weight live longer than the men who mention it.

And then there was this bank robber who didn’t have a mask. So he used a face shield instead.

BOOK REVIEW: Editorials: Edition: September / November 2020

Origin of
the species

Over the decades, SA asset management has rolled with the times.
It has shaped, been shaped by and shaped up to myriad challenges.

You might be astonished by what you thought you knew, but didn’t. Or by what you thought you didn’t need to know, but did. In a country as appallingly short of corporate memory as SA, the delightfully readable Building

Capital* satisfies both strains touched by asset management.

This history of the industry is a labour of love by Muitheri Wahome, a meticulous researcher of Alexander Forbes pedigree. Dozens of interviews and mountains of analysis have resulted in a volume of stories from the past with lessons for the future.

For old timers, memories (mainly affectionate and respectful) are revived by the mere mention of personalities who played legendary roles in the evolution of a speciality within the financial sector.

For more recent participants, and usefully for those still to come, there’s piece-by-piece explanation to help them understand why they’re sitting where they are; prettily or otherwise, as they too will be assessed in time.

And for those who use the services of asset managers – just about everyone in a pension fund or unit trust – there’s the comfort of institutional adaptation and longevity. They bend to clients as much as clients to them, differently evidenced by erstwhile greats who’ve disappeared (such as mutual funds pioneer Union Acceptances) and cheeky start-ups now establishment pillars (NinetyOne and Coronation amongst them).

From the infancy of money management in large life offices, through the extremes in political weather to the big bang of deregulation and the rapid onset of game-changing technology, there’s modern-day relevance in how opportunities were identified and grasped.

Even during the years of upheaval and isolation, and perhaps because of them, risk-taking and entrepreneurship were honed for the SA industry to hold its head high in international rankings of growth and performance. It was remarkable for a marketplace so small and concentrated.

Within a context of decades, Covid-19 is another turn along the road of constant change. Go back a little, to the days when stockbrokers (remember them?) plied institutions with free research in order to gain slugs of their trading business.

“The investment banks were more aggressive than the life offices, focused on short-term annualised returns which were now recorded in a growing number of readily available investment performance surveys in the market,” Wahome notes.

“The merchant banks took on more risk to generate extra returns for clients, resulting in realised returns in the 1980s and 1990s that occasionally outdid those of the conservative life insurers.

“As a result, pension fund investments started to shift from life offices to merchant banks that invested for maximum growth. The shift by selfadministered pension funds to appoint professional asset managers to manage their assets, rather than give them to an insurer in exchange for a guaranteed return, was an important stage in the evolution of asset management.”

Several life offices fell by the wayside. Remember Commercial Union, Norwich Union, Southern Life and Fedsure? But then there were those – notably Old Mutual for its nursery and Liberty for its chutzpah – where size and innovation weren’t incompatible. Now enter Allan Gray, shortly before the 1976 Soweto riots, to introduce the ownermanaged independent and a distinctive long-term contrarian philosophy. By stint of discipline, it eventually overtook life offices for assets under management.

Independents began to proliferate: Foord & Meintjies at the start of the terrible 80s, seeing an opening for unbiased advice; Investec Asset Management (now NinetyOne), as democracy dawned, to draw on the banking distribution network of its youthful parent; followed by Coronation, off to a solid start in breaking from Syfrets. Clients followed the professional reputations of its founders, Leon Campher amongst them. Each of these firms has its own story, briefly but insightfully sketched for unique attributes leading to such long-term success marked by allocations from pension funds (often following battles with consultants). But they also had outstanding common denominators in the forms of patience, perseverance and confidence in their capacity to deliver on promises. Talent was a given. Gems sparkle through the narrative. For example, with so much debate these days around prescribed assets, Wahome sets out how they once applied.

Similarly, with attention increasingly focused on socially responsible investment, she recalls the ground-breaking efforts of a determined Michael Leeman in setting the gospel for Futuregrowth. There was also black economic empowerment before the imposition of BEE, so to speak. For instance, Coronation assisted the launches of African Harvest and Kagiso Asset Management. (In turn, KAM derived from the Kagiso holding company whose financial bedrock in the bad old apartheid days was Liberty Life.)

Another example was the Community Growth Fund, initiated by Gordon Young from Labour Research Services. He wanted a socially-responsible union fund and eventually got it. This was abetted by support from Campher, then at Syfrets which managed the assets.

Critically important to systemic change, from defined-benefit to defined-contribution retirement funds, was the trade-union movement. Although the switch was happening around the world, in SA it was accelerated by the socio-political turmoil of the 1970s and 1980s.

Workers wanted to control their own funds, particularly to push for improved withdrawal benefits and to participate in investment decisions, while employers were happy to be let off the hook for investment risk. This saga has yet to play itself out, if ever it will.

Wahome records the rise to prominence of black people amongst the established asset managers, and notes how various black-owned firms have contributed to transformation by the training of young black professionals: “While these successes have gone some way to making the assetmanagement sector, it remains true that startup firms are vulnerable businesses and struggle to survive.”

As pointed out by Brian Molefe, when he was chief executive of the Public Investment Corporation, these younger black-owned firms should not rely on PIC allocations for survival.

Moreover, as Wahome has found, most of them target institutional public sector and union clients with low-risk mandates: “Few of these firms play in the retail space where low brand awareness, lack of capital to invest and grow the brand, and access to distribution services on linked investment service platforms, remain a challenge.

“Lack of a strong multi-asset class and global capabilities are a huge limitation…There is also the existential challenge that a lack of economic growth and poor retirement-fund preservation crimp savings growth in the retirement-fund industry, the mainstay of most firms.”

A striking feature of the narrative is the constant shifts in the personalities and deals that have shaped and reshaped this hotly-contested corner of the financial sector. Another striking feature is implicit in gauging a most profound of shifts. It’s that, relegated in a flash to distant memory, the masters of the universe are no longer the throngs of white gentlemen who once adorned the bar at the Rand Club.

*Building Capital: The Development of Asset Management in SA by Muitheri Wahome will be privately published and available for sale later this year.

LIVING ANNUITIES: Editorials: Edition: September / November 2020

Watch how the numbers

Dave Crawford, an experienced financial planner, draws attention to the risks of
over-optimism about future investment returns.

As a Cassandra, I have frequently warned on the dangers of investing in a living annuity without understanding the risks. Sadly, it seems, I am being proved right in a way I would never have wanted.

For those who haven’t yet invested in any of these products, living annuities provide a different approach to investing in a pension. The rules are pretty much the same as for any lumpsum investment from which investors want long-term income. Simply put, you invest the lump sum to grow both in capital growth and with retained income.

The idea is that you then withdraw an income that will increase to keep pace with inflation. But you will find that while the theory is simple, the practice is a little tricky. In fact, it can be more than a little tricky.

An example

I think this is best illustrated with an example: I invest a R1m lump sum in such a pension and I draw a pension of 5% per year. I will need at least enough investment growth in that year to replace what I drew as income.

But if I only replace what I took out I will sit, at the end of the year, with the same amount of capital as I started. Well, that’s not quite true because costs must also be paid. So if I draw 5% of capital for a pension and my costs are 2% of capital, I will need to earn at least 7% in growth.

So 7% is the actual size of my pension drawdown. If I can only replace it with those earnings each year, I must increase the percentage that I take out if I am to have an annual increase in my pension.

But every time I increase the draw, I must increase what I earn on my investment. Only one or two years of poor performance and I will be in trouble.

A better way of dealing with this is to review the draw in terms of the full equation. It tells me that if I draw a pension of 5% of the capital each year, have costs of 2% of my capital each year and have an inflation rate of 6% per year, I really need investment earnings of 13% each year to keep my pension rising by inflation.

In current markets, 13% may well be a bridge too far. And so, if I am to have a shot at my pension keeping pace with inflation, I need to have a really hard look at this aspect. “Aha!”, you may say, “but as you get older you spend less and of course it’s not forever as you have to die sometime.”

Well, I don’t know about you but I am not prepared to plan on running my investment capital down to zero by a particular date, when I will have no safety net if I live longer. To me it makes sense to manage my living annuity as though I will live forever.

Also, of course, we have no real idea of our personal inflation rates – for example, with medical

Dave Crawford, an experienced financial planner, draws attention to the risks of over-optimism about future investment returns.

Todays Trustee September/November 2020 35 rates and expenses rising as they do with age — so that assumption may have to change. This leaves me with a hard alternative. I must somehow find a rate at which to draw my pension (as a percentage of my capital) to fit between inflation and costs without exceeding the total investment returns that I earn.

I must be careful of over-optimism in expectations of future investment earnings. Predictions of future earnings are guesswork, as the Covid-19 outbreak has helped to demonstrate. Many people who have too little capital saved at retirement opt for high percentage pension draws.

Unfortunately, this either reduces their capital more quickly or it requires them to earn investment returns that are just impossible.

Living annuities are excellent products. But, like in using firearms, you really do need to understand the risks.

IMPACT INVESTING: Editorials: Edition: September / November 2020

Meat on
the bones

Timely study of SA pension funds’ attitude to ESG. Also affected
are Reg 28 and infrastructure.

Not a moment too soon comes the Intellidex report on impact investing. Examining the 2020 portfolio strategies of SA pension funds, the research was generously funded by Ashburton Investments. It deserves credit for having brought this pre-Covid analysis into the public domain just as the heat intensifies on possible amendments to Regulation 28 for pension funds to support infrastructure development as the purported “flywheel” for economic growth.

In a webinar on release of the report, Stuart Theobald of Intellidex expressed satisfaction that the 49 funds which participated in the study were adequately representative of the industry. Amidst the heat, Heather Jackson of Ashburton intended that the study would “add quality to the narrative” of investing for impact.

It does so in that it quantifies approaches of larger and smaller funds in response to particular questions. A useful follow-up would be a more qualitative examination of the gap – and there is one – between pronouncement and practice.

One size fits all for the virtue-signalling of compliance with the regulator’s directives for socially-responsible investment (SRI), but not so the relative enthusiasm from one fund to the next.

On the face of it, as the report encapsulates, SA looks incredibly good on the global continuum. Reg 28 of the Pension Funds Act, it says, is an “exemplary piece of legislation giving clear guidance that ESG (environmental, social and governance) factors are considered, and responsible investment is linked to the fiduciary duty of pension fund trustees”.

“Yup,” say trustees. “We’ve ‘considered’ so let’s move on.” More often than not, it’s for consultants to do the considering and asset managers to do the implementing. Where there are trustees to whom SRI is comprehensible through its myriad definitions, they’re usually amongst the larger where the requisite professionalism is found at board level. In effect, Reg 28 merely binds trustees as conduits to their service providers.

Key findings

One key finding is the report by investors that they “actively engage investee companies through shareholder resolutions”. Who are the most active of these investors? With what frequency do they engage and find their resolutions accepted?

Another is that “almost all respondents expect sustainable investing to become more important in the next five years”. Do they now? So what will they be doing about it?

The report recommends that Reg 28 be updated so that pension funds are encouraged to include in their policy statements the impact investments as defined by the Global Sustainable Investment Alliance. Yes, it should be updated in this respect and much else besides.

For far too long, and most urgently now, is there need for Reg 28 revision. The prudential limits for investment in the various asset classes haven’t been reconsidered in years.

Most notable is the dismissiveness of unlisted investments, pretty insignificant on the drafting of Reg 28 a decade ago but hugely significant today when it comes to investment in SA infrastructure. Indicative is the 2,5% of assets allowed in the category of “other”.

By contrast, the way Reg 28 now stands, pension funds may invest 100% of their assets in bonds guaranteed by the SA government. That amendment to Reg 28 seems imminent, specifically to accommodate infrastructure as if it were an asset class, implies that in the envisioned public-privatepensions partnership these investments will not be supported by government guarantees. If they were, the amendment would be unnecessary. Since they won’t, it may be asked what the contribution of government will be in correlating the risk-reward ratio. Or even whether a contribution from government, which has little money of its own, will be offered at all.

For instance, the way things stand, large asset managers such as Old Mutual Alternative Investments and Futuregrowth have proven successat identifying and financing infrastructure that theythemselves develop.

Good on paper

Whether it be houses or hospitals, pension fundscan make allocations to the managers so long asthey stick within the Reg 28 limit for unlisted investments. There’s no obvious reason that, for investment by pension funds, state-identified projects be prioritised over those in the private sector.

Much as SA looks good on paper internationally, it is unique in important respects. Most obviously, in assessment of ESG, the legislated requirements for black economic empowerment dominate the SRI criteria. To some extent, it may crowd out others such as climate change and education programmes.

On governance, there’s a craziness. Pension funds have no choice than to be in Naspers which dominates the JSE. Yet it passes muster despite a two-tier structure for shareholder votes, allowing the majority of investors to be ignored in their opposition to resolutions proposed by the directors, and its major subsidiary totally alien to the SA economy.

Similar anti-ESG anomalies apply to BAT (tobacco) and Sasol (fossil fuels). Both have nonetheless been must-haves in fund portfolios because, prior to the recent travails of Sasol, their rand-hedge and liquidity attractions overrode all else.

It underlines the paucity of JSE-listed companies available for investment by pension funds. Reg 28 allows for a maximum 75% of a pension fund’s assets to be in JSE equities. This is problematic in numerous respects.

First, a 75% ceiling is too low for younger fund members with extended investment horizons. Second, the paucity of shares is exacerbated by delistings and smaller caps unsuited for pension funds. Third, because of such limited choice, the prices of those which are suited can be unrealistically inflated.

Redrafters of Reg 28 face an unenviable task. From a policy perspective, they’re likely also to be torn on whether the present allowance for offshore investment should remain, reduce or increase. Uppermost should be stimulation of the SA economy, right down to increasing investment in renewable energy at the expense of Eskom, and at the same time not to force a compromise in the integrity of the pensions system by directing funds to investments of government’s selection.

The Intellidex study lays a foundation for much of the debate to come, and later for getting to the nitty-gritty of measurement and disclosure. As a whole, the report is a most worthwhile read for trustees simply to extend their knowledge of SRI in its numerous facets.

The entire concept of “sustainability”, however defined, relates to the long term. In present-day SA, the long term is a long shot. For the short term in SA, most likely, strategies for sustainability will be overshadowed by tactics for survival. In the process, ESG might lose some of its lustre. At the same time, the exigencies of impact investing won’t.

COVER STORY: Editorials: Edition: September / November 2020

Back to the precipice

In the recovery-or-bust scenario that faces SA,
both pension funds and the IMF have huge roles.
Taken together, there must be a strong chance of positive outcomes.

Whenever this ANC government announces an initiative, it’s quickly followed by incredulity. Not without good reason is the scepticism provoked by long experience of promises designed to deceive or policies destined to fail.

Why should this time of Covid-19 be any different? It’s because potentially – the key word being ‘potentially’ – choices are confined by the anticipation of bankruptcy. As previously in SA, when the fiscus was blown, economic sovereignty and political fantasy become subservient to bond markets.

In 1989, the sanctions-induced deprivation of foreign exchange significantly tipped the SA government of F W de Klerk to commence the abandonment of apartheid. Right-wingers in the ruling party were defied.

Slightly over three decades later, as a consequence of the junk downgrades induced by a decade of endemic corruption, the urgency to attract foreign exchange has forced the SA government of Cyril Ramaphosa into contracting with the marketsorientated

International Monetary Fund. Left-wingers in the ruling party, of statist inclination, had better be defied.

If they aren’t, causing Ramaphosa to stagger and stumble under their weight, the populist consequences are eerily predictable: raids on peoples savings, tax increases that stimulate capital flight, exacerbated rand weakness and overworked Reserve Bank printing presses….Such is the uncertainty that it’s guesswork whether the post-March clawback in JSE share prices foretells an imminence of recovery or an inevitability of inflation.

In the same way that February 1989 sparked an ideological shift of seismic reverberation, so too can the IMF sign-up in July 2020 do much the same to time-worn clichés that masquerade as weapons to attack poverty, unemployment and inequality.


There are positives, mainly in finance minister Tito Mboweni and Reserve Bank governor Lesetja Kganyago – respectively representing National Treasury and the independent central bank – being the curators of orthodox fiscal and monetary policies.

They’re informed by prudence, not grandstanding. Their sobrieties are consistent with IMF principles of marketplace deregulation and competition, the precise antithesis of central command that continues to find favour in the ruling party.

That much is illustrated by power-drunk dictates of the national coronavirus command council. Its contradictory extremes are hostile to business with which government wants a social compact. They also diminish the tax base on which government relies, frighten the capital investment which government urges, and obliterate jobs capable of retention.

The $4,3bn IMF loan, at nominal interest and minimal conditionality, is an act of generosity to help SA through its most immediate Covid-19 setbacks. How it’s disbursed will be watched before the next tranche, much bigger and more onerous, is inevitably requested within the next few years to assist SA through its foreseeable balance-of-payments quandaries.

Until then, Mboweni is fortified in his Budget promises. He’ll be monitored for implementation of expenditure ceilings, and on whether he succumbs to life support for decrepit state-owned enterprises. The IMF, unlike VBS mutual bank with which certain politicians are more familiar, prefers an environment that will allow for repayment of its loans.

What does this have to do with pension funds? Pretty much everything because they’re targeted money pots for the surge in new infrastructure projects intended to trigger economic recovery. It makes conceptual sense.

The long-term nature of pension-fund liabilities corresponds to the long-term nature of infrastructure returns, and there are loads of assets in pension funds misdirected from support for SA’s real economy. But neat theory bangs against tough reality:

• The fundamental purpose of pension funds is to provide for pensions. The better the investment returns, the better for members’ retirements. Fund trustees who knowingly or negligently pursue sub-optimal returns are in breach of their fiduciary duty to fund members, and personally expose themselves to civil remedy;

Accordingly, infrastructure projects offered for pension-fund investment will need to compete on risk and return with other market opportunities. Introduction of prescribed assets would represent the opposite i.e. force a proportion of pension funds’ assets into uncompetitive returns, the very rationale of prescribed assets being the supposed requirement of the ‘developmental state’ for interest-rate subsidisation by pension funds;

Prescribeds would also represent the failure by the state to attract investment on a market basis. This is hardly a signal of confidence for foreign investors. Moreover, there cannot now be a trade-off in lower returns that will result later in an exacerbated crisis for retirement funding;

For encouragement of contributions to pension funds, the state offers tax incentives. It’ll be absurd, and self-defeating, to incentivise contributions on the one hand and cancel their effect by prescribed assets on the other;

In response to Covid-19, the Business for SA(styled B4SA) grouping of private-sector associations calculates that R3,4 trillion of baseline funding will be required over the next three years “to deliver an accelerated economic recovery strategy”. This amount approaches the total assets in privatesector pension funds. So whatever amounts they invest will have to be bolstered from other domestic sources and particularly from institutions abroad.

Few are likely to be impressed by returns predicated on prescribed assets;

In June, under auspices of the presidency, a symposium was held via Zoom on sustainable infrastructure development. After the symposium, a list of 55 mega-projects was produced. Subsequent to the symposium, nobody is any the wiser as to their respective costs, prioritisation and timeframes to completion;

Nobody is any the wiser, either, on whether prescribed assets will be introduced for the funding. Ramaphosa’s silence is deafening;

His obsequious audience never sought to ask whether investments by pension funds might enjoy government guarantees, whether the state element in public-private partnerships had the necessary capacity to play the implementation roles envisaged for them, and whether transformation quotas could be impacted by heightened demand for technical skills;

Meanwhile, due to Covid-19 following years of lacklustre performance of the SA economy, pension funds are vexed. For the past five years, generally speaking, returns have been minimal and not beaten inflation. When savers aren’t seeing real returns, they start to question whether they should be saving at all;

For employers, reduced to survival mode in their core businesses, many will be questioning whether they still want to offer a pension fund to employees. If they do, their next question will be whether they can sustain their present levels of contributions;

At the employee level, obviously, pension funds are hammered. With the devastation from lost jobs and salary cuts, individuals’ pension pots stand between them and penury. It then becomes a race between recovery in the jobs market or their money running out. At least, for a while, they have a stopgap that alone demonstrates the value of having saved.

But that’s little consolation for National Treasury, as a pillar of the financial system is shaken, or for financial institutions, as their customer base shrinks.

The litany of woe deepens for the millions of unemployed who rely entirely on social grants, which cannot be indefinitely extended, to save them from starvation. It’s economic recovery or bust.

Two modest suggestions for Ramaphosa. One is to declare his position on prescribed assets so that it’s clear whether portions of pension-fund assets are at risk of expropriation without compensation.

Another is to crack down, really crack down without favouritism, on the corruption brazenly out of control. SA has never previously been as desperate for investment, both domestic and foreign. There’s plenty of it, potentially, provided that SA is seen as a safe destination financially and physically.

An inert Ramaphosa has done little to make it so. The IMF support has arrived in time to light a fire under his feet.

CURRENTS: Editorials: Edition: September / November 2020

Doubts about Dube

Mboweni makes flawed choice for FSCA interim commissioner.
Tshidi tied at the hip to Mostert.

With so much on the plate of finance minister Tito Mboweni, such as trying to generate a little warmth into the SA economy, it’s perhaps unavoidable that a few crumbs will fall off. One recently did. It’s on Mboweni’s appointment of Dube Tshidi to “perform the functions of commissioner” at the Financial Sector Conduct Authority.

The appointment runs for three months until 5 November or until a new commissioner assumes office, whichever is the sooner. The search for a commissioner has so far taken National Treasury more than 52 months during which Abel Sithole, now at the Public Investment Corporation, was acting (pun unintended).

Tshidi had a long career at the Financial Services Board; so long that he’s several years past retirement age. The FSB was the predecessor of the FSCA where Tshidi, the former FSB executive officer, has headed the transitional management committee (2018-19 remuneration R7,5m).

Mboweni seemingly hadn’t attempted to test the FSCA’s internal waters. The first executive response didn’t take long.

Within a few days of Tshidi’s appointment, Caroline da Silva gave notice of her intention to resign. The FSCA divisional executive for regulatory policy, and previously FSB deputy registrar, the FSCA announcement of her resignation tersely stated that “at this stage Caroline has no plans on the next chapter of her career”.

Read into this what one will. DaSilva might or might not have been in the running to become at least a FSCA deputy commissioner. Nonetheless, the timing of Tshidi’s appointment and Da Silva’s resignation implies something less than coincidence.

More curious is timing that relates to a judgment in the Pretoria High Court. Although dated 13 May, it was only issued to the parties on 21 August. The main parties were attorney Tony Mostert and the Public Protector. Acting Judge Brad Wanless had denied Mostert leave to appeal against punitive costs previously awarded against him.

Strangely, 21 August came a fortnight after the Tshidi appointment. Of course, it’s possible that Mboweni was unaware of the judgment. However, it’s impossible that he was unaware of the matter that lay behind it.

This is because, in her report of March 2019, the Public Protector had instructed that “the Minister of Finance note my findings”. The report was on her “investigation into allegations of maladministration, abuse of power and improper conduct by the former executive officer of the FSB, Adv D P Tshidi, as well as systemic corporate governance deficiencies at the FSB”.

On publication the FSCA said that it intends to take the report on review, so damning are its contents and conclusions. Throughout the investigation, which focused largely on the curatorship of certain pension funds, Mostert and

Tshidi were joined at the hip (TT July-Sept ’19). A central issue was the curatorship and legal fees taken by Mostert and his law firm, estimated at over R240m during the six years to 2011. No further quantification was possible for subsequent years because both Mostert and Tshidi “steadfastly refused to make any disclosure whatsoever”.

Another issue was that Tshidi had threatened Sanlam and Alexander Forbes that he’d withdraw their operating licences if they persisted in resistance to Mostert’s demands. Early last year Mostert attempted to interdict publication of the Public Protector’s report. Not only was he unsuccessful but Wanless ordered that he personally pay the costs on the punitive scale of attorney and client.

Mostert had cited various funds under his curatorship as co-applicants. “It is difficult to understand why they are applicants herein,” the judge stated. “The court agrees that the pension funds and members thereof should not be mulcted on costs.”

In his decision this year, Wanless dismissed Mostert’s application for leave to appeal on the costs order “because of the character of the litigation, the conduct of (Mostert) and the impropriety on behalf of (Mostert) in the manner in which the litigation was pursued”.

For context, these judgments were inseparable from the still-surviving report of the Public Protector. In applying his mind to the Tshidi appointment, did Mboweni know or not know about them? Either way, an explanation wouldn’t be out of place.

There are two other little matters, of recent vintage, both also related to operating licences subject to Tshidi’s decisions. One is the unresolved saga of asset manager J M Busha over workers’ missing millions in retirement funds (see story below).

The other relates to retirement-fund administrator Akani. Notwithstanding requests in past years by the Pension Funds Adjudicator for the FSB/FSCA to review its operating licence, Akani has won a court victory over NBC for administration of a workers’ provident fund (see article ‘Litigation’ elsewhere in this TT edition).

On these recent examples of market conduct, Mboweni would do well to keep an eye on how Tshidi asserts his authority; for example, whether Tshidi has or will recuse himself from FSCA deliberations on disclosure of curator fees.

Beat around the bush

Credit to journalist Sabelo Skiti of Mail & Guardian for his persistence over months in tracking and exposing the regulatory scandal at J M Busha Asset Management. M&G reports: “Nearly R500m of workers’ pension funds has been stolen and invested in risky initiatives, including that of controversial evangelist Shepherd Bushiri.” Despite this, the FSCA has handed back to Busha his operating licence in the hope that he will return what he owes to the funds. The funds (see table) are entrusted with money for the pensions of more than 2m people in the electrical, metals and engineering sectors as well as municipal workers.

Bushiri, a self-proclaimed “prophet”, is now the subject of rape allegations against women. Busha is said to have ploughed R200m of the workers’ funds into the Bushiri company which operates hotel chains in Africa and Europe.

M&G also refers to investments in eSwatini and Nambia that cannot be recovered. “Busha took relatively small amounts from pension funds he was managing and used this money to invest in privateequity transactions under the name of his businesses instead of under the fund,” it says.

A spokesperson for the FSCA is quoted: “We are monitoring (Busha’s) actions on a monthly basis and will be in contact with the pension funds to ensure that the best possible alternatives are pursued…to ensure that the public is not in danger.”

Apples and pears

Thus it might be said of the Active versus Passive debate, inclined to flair when markets crack as they did in March. Because comparisons are odious, and inclined to be simplistic, the arguments cannot be conclusive.

There are passive funds that are largely active, and active funds that are largely passive. For any one investor, there’s room for both. And the arguments against active, that they are more expensive than passive which they cannot outperform net of fees, don’t necessarily hold up to universal scrutiny.

It depends on what’s being compared. Even to go passive requires an active decision into which index of the plethora available, as this accompanying Coronation slide illustrates.

In similar vein, Coronation has produced its annual stewardship report. Amongst other things, it shows that in SA last year this active manager had made voting recommendations on 3 104 resolutions at 195 shareholder meetings. Of the votes cast, 234 were against resolutions proposed by the investee companies.

Not too many passive managers can display comparable stewardship, contribution to share-price discovery, engagement on ESG criteria or entry into the unlisted space.

They all come at a cost. Investors decide whether they’re worthwhile.

Mark these words

It’s taken Covid-19 to give ‘impact investing’ a leg-up. From the mega-projects contemplated at state level to the more imminent formulated at institutional level, a common denominator is the approach to pension funds for investment in this category.

Regulation 28, which stipulates permissible exposures to respective asset classes, will have to accommodate it. Clearly, asset managers are rethinking the validity of traditional weightings in listed equities and bonds.

When Covid-19 is destroying employment, shrinking investable opportunities, attention rightly turns to redress. For instance, in recent months both NinetyOne and Stanlib have launched funds to assist businesses that have been hurt. At

NinetyOne it’s the R10bn ‘recovery fund’, set up with private equity company Ethos, where investors are offered the opportunity for commercial returns in supporting distressed companies that would otherwise be viable.

At Stanlib it’s a fund that will focus on investments “to increase economic capacity-building via transformational infrastructure”. There’s also to be funding for small and medium-sized businesses (SMEs) included in a “diversified pool of credit exposures” that’s part of a “broader drive for private capital into impact-themed investments”.

And then, concentrated solely on SMEs, there’s the Kisby investment fund headed by erstwhile banker Mark Barnes. With a range of strategic partners which includes asset manager Fatima Vawda of 27four and components of the diversified Lebashe group (the Arena media titles amongst them), it will be significantly driven by technology to administer multiplicities of small loans.

Barnes sees these SMEs as an asset class in the middle of the eco-system: “Let’s invest in real people doing business with one another, providing fairlypriced capital for new Alexandra businesses rather than Sandton office blocks.”

Amongst ideal requirements to qualify for a Kisby loan are an existing annual turnover of R100m with 20% annual growth post Covid and present ebita above R10m. Kisby sees itself as a bridge for companies that have slipped to lower credit ratings but have clear paths back, and those which are growing but have limited access to formalised capital markets.

Kisby’s immediate target is to raise R5bn from three or four major institutional anchors. If Barnes’ enthusiasm is as infectious as his presentation is articulate, it should be a piece of pie.

Sanlam says

The latest Benchmark report records that, prior to Covid-19, impact investing was not top of mind amongst financial consultants. But this approach has “changed dramatically”. When questioned on the levers available to rebuild the SA economy, the research found, the most popular option was use of the large pool of unclaimed benefits in the industry to beneficiate poor communities: “This is a promising and potentially responsible use of monies that are unlikely to be reclaimed by the majority of members.”

The next three most popular responses all related to applying the capital of retirement funds to impact society and the economy via increasing asset allocations to sustainable infrastructure development, ESG investments and alternatives.

US disaster

Coronavirus, disappointing investment returns and declining interest rates pose a triple threat to the US public pension system. It is haemorrhaging cash and heading for a record funding shortfall, reports FTfm.

It’s estimated that returns of US public pension plans averaged minus 0,4% over the 12 months to end-June, well below the 7,2% targeted by these schemes. Their weak financial position, which posed severe risks to the living standards of millions of employees and retired workers, was made worse because rising cash outflows led to more pressure on investment returns to meet future retirement payouts.

Only in the US?

ASSET MANAGEMENT: Editorials: Edition: September / November 2020

Peek into the post Covid-19 future

Having analysed the past evolution of the industry (see Book Review),
Muitheri Wahome and Bev Bouwer* anticipate profound changes ahead.

The cost structure of an asset management business has changed, with many costs rising faster than inflation. Controlling expenses without diminishing capacity to deliver to clients, cash preservation, reprioritisation and reallocation of budgets is crucial.

It is expensive to hire risk and compliance specialists to deal with an ever-changing regulatory environment and provide the right technology to support the different compliance functions, many of which are more challenging in a home office environment – sign-off control systems, for instance.

Bloomberg and many data systems used in investing are billed in dollars. Rand depreciation continues to ratchet up technology costs. Firms are more expensive to run, and it takes more assets under management to just break even.


Building a resilient firm that can survive continued margin pressure means upgrading operations and the faster adoption of digitisation in an industry that is notoriously considered a “digital laggard”. The technology infrastructure, software and hardware must also be adequate to support a different technology environment where the entire office works from home.

There is an opportunity to spur business improvements, redefine certain customer service experiences to lower costs, improve productivity, and create internal capacity to do more while preserving jobs. Partnering with business-critical suppliers that can bring the right skills or opportunities to the core business is certainly worthy of consideration.

The Covid-19 pandemic will accelerate industry consolidation to the extent that many firms will need to grow assets under management faster than their underlying fixed cost bases. However, large asset management firms are leery of the big transformative acquisitions of the early 2000s.

Fraught with risk

Experience shows mergers and acquisition are notoriously difficult to execute. Trying to integrate a business and bed down different cultures and technology without a clear understanding where the vulnerabilities are, is fraught with risk. High institutional client overlap adds to the risk of client attrition after the merger.

The objective of any acquisition should be clear – whether it is forming an alliance of firms to scale resources; buying assets to gain scale; adding a new investment capability; enhancing black economic empowerment credentials; taking a stake in an umbrella fund; or “lifting” a team that has unique capabilities – and must be duly considered when embarking on this course.

Asset managers without a strong performance track record will come under pressure as investors gravitate towards top-performing firms. Over the next 12-18 months, there is likely to be a “flight to quality” as clients flock to those businesses seen as low solvency risks; where they can trust the business continuity processes, get quality service and a distinctive experience, competitive fees and expect good investment performance.

Not every asset management firm will survive the market upheaval from the Covid-19 crisis. Marginal firms without sufficient cash buffers — or patient, deep-pocketed shareholders — will go out of business.

Access to government assistance plans and regulatory abeyance to support businesses that are experiencing short-term stress will help some companies, if assets under management do not drop significantly.

Distribution networks

Access to distribution networks to sell their products gives insurer-owned asset managers a slight edge here, but even in this instance they cannot escape a slowdown in insurance premium growth. While these closures will be disruptive and extract deep social costs, they may leave the sector on a stronger footing in aggregate.

One innovation to come out of the crisis is the changing perception of working from home. Contrary to most expectations, productivity has been higher, with less dead time travelling. Managers will need to be more flexible than they have been about how people work, even when restrictions start to ease. Longer-term, this new way of working may mean reductions in the amount of commercial real estate required and firms will downsize their real estate footprints. Less travel could also reduce wear and tear on the country’s aging road infrastructure and result in lower greenhouse gas emissions with positive consequences for the environment.

Expensive conferences in fancy venues with overpriced attendance fees and attendant travel budgets may become a thing of the past. Virtual townhalls on virtual meeting and conference platforms (e.g. MSTeams, Skype, Zoom etc.) with financial advisers, consultants and trustees can accommodate hundreds, even thousands of clients at a lower cost than hosting large client events, and potentially without compromising effectiveness.

Virtual world

Maintaining the work culture in a virtual world without close proximity is a challenge. Leaders have had to adapt quickly to a complex, unpredictable situation, working under tremendous uncertainty.

Engagement with employees has had to change from in-person meetings to virtual video and telephone interactions. Greater awareness of one’s colleagues is needed – especially those who are managing many constraints working remotely. In meetings, creating opportunities for more reserved or introverted people to contribute and give input is key. This can make meeting dynamics better with the additional benefit of listening to fresh voices, although they may take longer to conclude.

*Extracted from their paper ‘A Brave New World’.

LITIGATION: Editorials: Edition: September / November 2020

Dirty business

Two fund administrators have a full go at one another.

Court rules against NBC but FSCA to look at Akani also.

The efficacy of the Financial Sector Conduct Authority stands to be tested by the manner in which it deals with the entrails of a judgment in the Johannesburg High Court. Such are the allegations of widespread corruption by the respective parties against one another – essentially pension-fund administrators NBC and Akani – that Justice Vally has left it for the FSCA to get to the bottom of them.

Best of luck to the regulator in ploughing through the thousands of vitriol-filled court papers. But credible findings are owed to the industry as a whole. If there are backhanders for the allocation of mandates, this is the perfect opportunity to expose them and to set an example in dealing with offenders.

Ultimately the court approved the replacement by Akani of NBC as administrator of the Chemical Industries National Provident Fund. Variously embroiled in the dispute were also members as well as trustees of the CINPF, taking different sides, and the troubled Chemical, Energy, Paper, Printing, Wood &

Allied Workers Union (Ceppwawu) that had recently been placed under administration. For many years the CINPF was administered by NBC. Late last year the fund’s board terminated the contracts with NBC and appointed Akani. Eight fund members and NBC then launched proceedings to have these decisions set aside. Against them in the litigation were 25 respondents, at the time the CINPF trustees, and Akani.

There was no dispute that three CINPF trustees had received payments from a company called Neighbourhood Funeral Scheme “which is associated with the main shareholder of Akani”. But there was bitter dispute over the legitimacy of those payments.

The contention of NBC and the member applicants, allegedly acting as fronts for NBC, was that the decision to appoint Akani had been tainted by corruption. The FSCA and the police, said the court, were the correct bodies to investigate these allegations. Originally there’d been 110 “member applicants” claiming that they had a “direct and substantial interest in the application entitling them to intervene”.

But the filed documents made it difficult for Akani to verify their authenticity or the veracity of the signatures. “They gave Akani no real opportunity to deal with this issue,” said the court, “and Akani had every right to challenge their authority.”

The judge found that NBC lacked standing so there was no need to examine the merits of its case. At the same time, Akani challenged the member applicants on grounds that they were simply the alter ego of NBC.

When asked whether NBC was funding the litigation of the members applicants, Akani was told that the subject was none of its business. “Akani also brought substantial evidence to show that NBC involved itself without lawful cause in the affairs of Ceppwawu,” said the judge. “The evidence aims to show that the involvement was disrespectful of Ceppwawu, disruptive to its activities and destructive to its structures.” The purpose of the involvement was for NBC to recruit fund members who’d then launch the proceedings for reinstatement of NBC at the CINPF.

The fund said that its termination of the NBC contracts was based on particular facts:

In 2018 it had asked NBC to invite asset managers to bid for the property portion of its portfolio, at that stage run by Absa. NBC recommended a company, Motheo, to take over the portfolio. But it transpired that Motheo did not hold a licence to trade in the relevant sector;

• NBC had invested some of the fund’s monies in an offshore account. When questioned, NBC could not shed any light on where these monies were;

 • The CINPF board had become suspicious that there might have been “maladministration and corruption” of fund monies following certain NBC disinvestment.

Against this background of believing that NBC had been “grossly negligent in its dealings with the fund”, the CINPF board commissioned Gobodo Forensic & Investigative Accounting to conduct a probe. Amongst its findings:

The fees charged by NBC were not market-related and therefore not in the best interests of the fund e.g. fees charged for “Admin” had increased by 25,4% during 2017-19, and fees for “investment consulting” had increased by 336,11% between 2016 and 2017;

The fund was over-dependent on NBC for advice on the appointment of asset managers. This overdependence was not in the fund’s best interests;

NBC was levying monthly fees of R700 000 for members who no longer belonged to the fund;

In addition, NBC had levied a separate fee of R4,2m for one of its services (‘agterskot payments’ to qualifying members). It wasn’t clear whether these payments had been approved;

The fund had suffered a R52,8m loss during the period that Avior Capital managed the transition of funds from the old to the new asset manager. The board should determine the reasons;

Despite requests, NBC had not provided documents related to disinvestments during three months of 2017.

Justice Vally concluded that the results of the Gogodo investigation “demonstrate without doubt that that the anxieties and concerns of the (CINPF) board bore substance, and that the board acted prudently by resolving to embark on the forensic investigation”. On having received the report, he added, “the trustees individually and the board collectively would have been obliged in terms of their fiduciary duties to terminate the (NBC) contracts”.

This can’t be the end of the matter. Such were the allegations of “widespread corruption” by NBC against Akani and vice versa, that the judge found them “disconcerting”. Corruption is “devastating to the rule of law”, he said, and here “the court should not hamper the FSCA or undermine its work by passing judgment on the same issues involving the same parties that are before the FSCA”.

FIRST WORD: Editorials: Edition: September / November 2020

A crisis after Covid

The pandemic has caused savings to be cashed in on a dangerous scale.
Programmes for consumer financial education must be reinvigorated.

SA was in a retirement-funding crisis before the advent of Covid-19. Today the crisis is much worse.
Year and year out, the most reliable savings monitors – from Sanlam, Old Mutual and Alexander Forbes – quantify the shortcomings. They might differ in detail but not in conclusion. Perilously few South Africans stand a chance of retiring with incomes that come anywhere near their pre-retirement salaries. Shock and horror that the prospect of a plunge in old-age living standards, on the widest scale not least amongst the middle classes, does nothing to change behaviour. One can analyse up hill and down dale why this is so, but no amount of analysis can mitigate the inevitable consequence where low individual savings converge with low investment returns.

Never more than now.

Companies have cut dividends that feed into shareholders, significantly pension funds; employers have reduced or suspended their contributions to pension funds; for the past five years the JSE hasn’t produced real returns, let alone the cpi+5% that’s a popular benchmark.

At the same time, many members of pension funds have lost their jobs or been forced by reduced incomes to cash in portions of their pensions. The size of the pension-fund industry, in terms of member numbers and asset under management, would both have shrunk considerably.

The good news is that many members (former members, more recently) had fall-back resources. This single-handedly demonstrates the value in having saved. The bad news is that, had they withdrawn as the lockdown hit in March, they would have reduced their pots as the market bottomed. They would then have had less investment to benefit from the subsequent fillip in prices.

Either way, in an environment of job destruction, the monies cashed cannot be recouped by an extension of working lives. Moreover, SA’s capital pool and the capacity of financial institutions are reduced for economic sustenance.

The institutions, guided by the Financial Sector Code, are obliged annually to spend at least 0,4% of net after-tax profit on consumer financial education. Even in the straitened circumstances that presently blight the institutions, the obligatory spend across the gamut of institutions – from banks to life offices – runs perhaps to over R100m.

So the money is there. But the impact, to judge by conclusions of the savings monitors, obviously isn’t. Spending today trumps security tomorrow. Through good times and bad, this ingrained mentality can possibly be reversed only by education programmes that actually work.

But to work requires two tricks. The first is in getting the horses (figuratively speaking) to the water. The second is in getting them to drink. These tricks are distressingly elusive.

Being the regulator, naturally enough the Financial Sector Conduct Authority looks to resolve the issue by regulation. It has produced a thoughtful discussion document, ‘Ensuring Appropriate Financial Education Initiatives’, on which it seeks stakeholder comment. In the manner of a regulator, it refines conditions for the supply of education on the untested premise that there is demand. Thus is the coach placed before the horse.

It’s bizarre that consumers are more sensitive to value-for-money comparisons when shopping in stores for small-ticket items than for big-ticket savings products. This is despite the obvious benefits for financial consumers in being able to make informed choices that will improve their financial wellbeing.

In this paper, the FSCA is concerned to “set requirements that financial institutions providing consumer education initiatives need to adhere to, including requirements for the monitoring and evaluation of the effectiveness, efficiency and appropriateness of the financial education initiatives”.

Well and good. The objectives are noble. And the methodology is consistent with the guidance note of the Financial Sector Transformation Council to measure the code’s consumer-education element of BBBEE for scorecard points.

The latter has been operative for the past few years. Experience in drawing candidates has been successful in pockets but not on the mass scale required for a difference to be evident.

One reason could reflect the bureaucracies required to set up the envisaged programmes, including the rigmaroles for monitoring and evaluation of impact. They come at cost and effort unfavourably disproportionate to the number of candidates, a trickle relative to the number of consumers.

Nonetheless, the FSCA is on the right track. At this stage is isn’t being prescriptive. Seeking input from stakeholders, it presents a series of questions to challenge their thinking (see box).

Next step, however, should not be the submission of written comments alone. Far better would be a round-table discussion to hammer out workable agreements in the mutual interests of the regulator, institutions and consumers alike.

Don’t start with debate on rules for compliance. It can kill creativity. Rather try, in the first instance, to stimulate ideas for getting horses to the water and, in the second, for getting them to drink.

Allan Greenblo,

Editorial Director.