ASHBURTON INVESTMENTS: Expert Opinions: Edition March / May 2020

Benefits of alternative investments

They’re numerous as Rudigor Kleyn, MD: corporate and institutional at Ashburton Investments, points out.

More SA investors are including alternative assets in their portfolios as they increasingly understand the benefits offered.

This echoes a global trend. In little more than a decade, global alternative assets under management have grown from $2 trillion in 2008 to about $5,5 trillion in 2019. They’re expected to exceed $8 trillion in 2023.

Alternative assets refer to those not traded on a public exchange. These include private equity, private debt, real estate and infrastructure. Also classified as alternatives are art, antiques and classic cars.

In the past, alternative investments were considered too difficult to access, high-risk or complex for many investors. But now they’re accepted as an attractive means to diversify portfolios, often achieving better inflation-beating returns than traditional listed markets.

Alternative investments cover such a broad range of investments it is impossible to classify the whole category as one particular risk. Some, such as a venture capital that provides seed money to fledgling businesses on starting up, are high risk. Infrastructure, on the other hand, is less volatile and lower risk with returns uncorrelated to business cycles.

The main benefit of including alternative asset classes in an investment portfolio is to have sufficient diversification to reduce risk and enhance returns. They may also act as an inflation hedge, provide reliable income streams, generate high absolute returns, contribute towards sustainable investing goals and provide access to emerging markets where public markets are thin.

How to grow portfolios

Investors should consider a welldiversified portfolio that can deliver a steady, above-inflation return throughout market cycles. This might include public market allocations to fixed income, public equities and cash complemented by some exposure to inflation-beating benefits offered by alternative assets.

As with any investment, the returns for private assets are not guaranteed. But they can potentially be higher than traditional investments, outstripping CPI to provide a good inflation hedge.

As it is more difficult to disinvest from alternative assets, investors are generally compensated with higher returns known as the ‘liquidity premium’. There are different types of alternatives.

Infrastructure investments refer to those in vital projects such as new roads, power supplies, airports, bridges, tunnels, ports, water and telecommunications. Across the world there is a growing need for more infrastructure, providing strong long-term demand. It is estimated that globally at least $3,5 trillion to $4 trillion of annual investment is required through 2035 to keep pace with economic growth.

In the past, infrastructure tended to be funded and managed by governments. Given constrained government finances,

there has been a growing role for private funding.

Private equity refers to shareholder capital invested in private companies as opposed to publicly listed companies. Private equity tends to involve more than simply the transfer of capital. Investors become actively involved in management to build the businesses into more sustainable and better-run entities. This ensures they make good returns while the businesses are left stronger and more resilient. Private equity investors generally  invest for the long term of around 10 years.

Private debt funds lend money to companies, as an alternative to bank lending. Investors in these funds can access better yields than government bonds offer in a fairly low interest-rate environment.

In summary

Alternatives offer distinct advantages such as potentially higher returns (which cannot be guaranteed) and greater portfolio diversification. Investors should understand the benefits and unique risks of each alternative-asset type.

LIMA MBEU: Expert Opinions: Edition March / May 2020

The role of machines in investing

Ndina Rabali, chief investment officer at Lima Mbeu Investment Managers, provides a perspective.

Artificial intelligence, machine learning, deep neural networks. These terms cause apprehension amongst asset managers and fund trustees. Gary Smith, a professor at Pomona College in California, puts them into context:

Computers can input, process and output enormous amounts of information at great speeds. Computers are relentlessly consistent. It is therefore tempting to think that computers are smarter than humans because they do some very difficult tasks better than humans.

Computers may be more efficient at discovering patterns, but they are still incapable of assessing whether those patterns are useful or merely coincidental. Only humans can make this assessment.

Computers do so many things well, but this does not mean that they are better investors than humans. This is why we prefer a Quantamental investment approach that integrates quantitative techniques with human judgement in building investment portfolios.

A simple example

Let us assume that someone wants to buy a house and that this house must satisfy a list of requirements, including price, size, location, style and functionality. What process would they typically follow?

Firstly, they would identify a list of potential houses to look at in their preferred locations by talking to estate agents, going through newspaper adverts, or trolling through various websites. They would also evaluate crime statistics for the area, drive around to observe traffic patterns and attend multiple show days. This is the traditional approach.

Or they could use artificial intelligence or machine learning tools to assess traffic patterns, crime statistics, size, functionality all at the click of a button. This would save time, money and a lot of unnecessary effort.

Use of a data-mining tool, to generate a list of potential houses to buy, not only contributes to improved efficiency but also removes bias in the process. For example, when driving around to evaluate traffic patterns, it could be that there was load-shedding on a particular day leading to a one-sided, biased view against a specific location. But a datamining tool can evaluate traffic patterns more accurately – without wasting petrol.

Secondly, they would conduct thorough due diligence. This involves inspecting the list of houses they have identified for faults that may not be immediately observable. In this case, technology may be of little use because human judgement will be required to identify significant or coincidental issues.

For example, assessing how a fresh lick of paint has covered the cracks on a wall would be too difficult for a data-mining tool. The point is that the most efficient process is one that combines the use of both human judgement and computing power. Some tasks are best left to a computer, and some functions should retain an element of human judgement.

For optimal results

In the same way, Quantamental investing aims to harness the best of both worlds to deliver superior returns for investors. They may use a data-mining tool or an advanced factor model to generate an unbiased list of investment ideas. However, human judgement still has a role to play in assessing ideas before they are implemented in a portfolio.

Investors and trustees are right to be apprehensive if they choose to continue ignoring the benefits that they can get from the use of advanced statistical techniques. This is why we believe that future success in asset management will require technological efficiency in the processing of information through expert systems. They assist in forming, controlling and implementing portfolios.

MOMENTUM CONSULTANTS & ACTUARIES: Expert Opinions: Edition March / May 2020

Empower fund members to save enough for retirement

Heed the advice of Rob Southey, head of asset consulting at Momentum Consultants & Actuaries.

Many members of retirement funds don’t know whether their savings are on track to reach their retirement goals. Even those who suspect their savings for retirement may be inadequate often bury their heads and hope for the best, unaware of steps they can take to improve their retirement outcomes.

Empowering education and ensuring members have access to the appropriate information at the right time are potent tools for helping them to make smarter financial decisions, leading to better retirement outcomes.

Funds’ trustee boards and management committees try their best to improve outcomes by creating appropriate investment defaults. However, defaults are typically designed around the “average” member. The reality is that the “average” member does not exist. This is particularly apparent when members reach their pre-retirement phases when investment portfolios ideally need to align with the individual member’s specific annuity choice.

Informed decision-making

The retirement-fund industry can be complex and confusing. Members need to be educated around how their funds work, how annuities work and what they can do to increase their retirement savings to receive an adequate income during retirement. Some actions members can take to increase their retirement incomes include:

• Increasing their contribution rates;

• Choosing the investment portfolio that best matches their personal circumstances and investment horizons;

• Keeping their retirement savings invested when changing jobs;

• Starting to save as soon as possible (if their employer doesn’t provide a retirement fund);

• Retiring later in their working lives.

Tap into technology

The practicality of educating members can appear overwhelming to trustees and employers. However, advances in technology and the ability of people of all ages and demographics to use technology like smart phones, tablets and laptops makes empowering education and communication far more possible than previously.

YouTube, podcasts, animated Whatsapp videos and easy-to-read articles on the employer’s staff website are a few of the many channels that can add tremendous value.

Consistent communication

For education and communication to have a significant impact, it is important to translate improved knowledge and awareness into action. Persistent communication, focusing on the same message across various communication channels and an escalating sense of urgency, are effective in getting people to start putting knowledge into practice.

Members need to be continuously informed of how their retirement savings are doing relative to their targeted goals. Where savings are falling short, they need to be informed of the actions they should consider.

While much of this information may be available on the employer’s staff website or in annual benefit statements, members often don’t prioritise a retirement ‘check-in’ until they’re nearing retirement. By then the impact of actions to improve retirement outcomes is limited. This is why a professional, wellorchestrated communication strategy designed to turn awareness into action is vital. The strategy should:

• Show members how potential actions can make a big difference to their desired outcomes;

• Clearly explain the options available to members when they need to make key decisions. These include choice of an appropriate investment portfolio at different life stages, choice of annuity at retirement and what to do with their retirement savings when changing employers;

• Highlight the factors that need to be considered when making choices;

• Inject a sense of urgency, but not panic, andencourage members to take control of their financial destinies.

It is also important that the demographics of members — particularly factors such as age, income and education level – are taken into account and communication is tailored accordingly.

Member apathy

There is a tendency to underestimate members’ apathy and overestimate members’ understanding of the retirement industry and terminology. Momentum Corporate’s research shows that members have a basic level of financial literacy. Yet there is general discomfort, regardless of age or income, around the industry’s terminology.

Education of, and communication with, fund members must become more top-of-mind for trustees. Effective strategies can have a significant impact on members’ retirement outcomes.

As a team of unbiased professional retirement-fund consultants, Momentum Consultants & Actuaries is positioned to assist with development of such strategies.

RISCURA: Expert Opinions: Edition March / May 2020


Petri Greeff, Head of Investment Advisory, RisCura

Pension funds today should be investing for a horizon of 80 years or more. While it’s impossible to predict what the world will be like in 2100, it’s safe to assume it will be radically different to the one we live in today.

We can expect the retirement industry to be disrupted by many unpredicted changes, but for now it’s more useful to consider the trends we can identify. How are these likely to impact long term savings outcomes, and what should pension funds do now to capitalise on the opportunities and mitigate risks?

Below are some factors the retirement industry should be considering in order to transform its traditional approach and ensure it is able to meet future expectations.

Increasing longevity

Life expectancy has increased dramatically across the globe and will continue to do so as technology and medical research advance at a rapid pace.

This means we are likely to be working for longer, and spending a more time in retirement too. Increasing longevity will have a significant impact on retirement contributions required, asset allocation, risk levels, and investment strategies for pension funds.

We may also see a fundamental shift in the way we accumulate savings over time. The old model of studying or training for a job and then building a long-term career in that field until retirement may soon be outdated. Increasingly, people may opt to stop and retrain mid-career – possibly even a few times over. This could change the nature of the traditional retirement journey, and the retirement industry may need to adapt accordingly.

In addition, many pension funds are likely to face the challenge of an ageing membership base with fewer new members coming in due to the impact of automation and AI in future. Are their current investment strategies designed to support and survive this?

Impact investing

As Millennials, Generation Z, and future generations form an increasingly large proportion of pension fund members, their voices will become impossible to ignore. What do they want and expect from their investments? Investments that will yield the required return and have a positive impact on society and the environment.

Pension funds have been incorporating ESG for some time now, but these requirements will only become more critical going forward. What should pension funds do now to position themselves for meeting the increasing demand for products offering strong returns and positive social impacts?

Climate risk

According to the Intergovernmental Panel on Climate Change (IPCC) – a United Nations body for assessing the science related to climate change – Southern Africa is a climate change hotspot. The Intergovernmental Panel on Climate Change notes that temperature increases in South Africa are rising twice as fast as the global average.

The impacts of this will be far-reaching and will affect food security, water security, and ultimately economic growth in SA. Any long term investment strategy today needs to be cognisant of climate risk and take steps to mitigate against this.


Robo advisers will become more prominent in the investment world in the coming decade and beyond. These will be a good option for “DIY” investors, since they are likely to offer the same advice at a fraction of the cost of traditional financial advisers. When it comes to larger pools of money – pension funds, or ultra-high net worth individuals, for example – we anticipate a hybrid approach to investment advice. Artificial intelligence will work alongside human advisers who have embraced new technologies. Are pension fund trustees doing enough to ensure they – and their advisers – keep abreast of the technological developments and innovations that are likely to disrupt the industry?

Increasing regulation

Corporate scandals and the need for more oversight are increasing regulatory requirements. This is placing strain on pension funds across the globe, and South Africa is no exception. Busy trustees simply don’t have the governance bandwidth to deal with the everincreasing requirements. Additional resources need to be allocated to ensure funds remain compliant and this ultimately comes at a cost to the members of the fund.

Each of these trends presents new challenges for pension funds and innovative solutions are needed. Investment advisers can answer the call by providing future-focused alternatives for trustees to preserve the best outcomes for their members while meeting industry requirements.

OLD MUTUAL INVESTMENT GROUP: Expert Opinions: Edition March / May 2020



In 2011, Regulation 28 of the Pension Funds Act was amended to, amongst other items, include two guiding investment principles for retirement funds. One of these principles pertained to the Sustainability of Investments (i.e. ESG integration and stewardship) and in June 2019 a guidance note was released by the Financial Sector Conduct Authority (FSCA) outlining the practical considerations that retirement funds should consider with respect to Sustainability of Investments.

The other investment principle pertained to Broad Based Black Economic Empowerment (BBBEE) and in September 2019, at the inaugural Financial Sector Conduct Authority (FSCA) Retirement Funds conference, the Divisional Executive for Retirement Fund Supervision, Olano Makhubela, announced that in 2020 the FSCA will be issuing a guidance note relating to Broad Based Black Economic Empowerment (BBBEE) in retirement funds.

This guidance note, like the one on Sustainability Investing issued June last year, is prepared for Principal Officers and Trustees of Retirement Funds on how to implement a principle of pension fund legislation, with a focus on section 2c(iii) of Regulation 28 of the Pension Funds Act that states:

“A fund and its board….must at all times in contracting services to the fund or its board, consider the need to promote broad based black economic empowerment of those providing services”. The principle’s objective was to deepen and quicken the pace of transformation in the industry, including amongst asset management companies such as ourselves.

This development follows the inclusion of retirement funds in the BBBEE Codes and the Financial Sector Charter in 2017 in a voluntary dispensation that supports the requirement “by Regulation 28 of the Pension Funds Act to consider environmental, social and governance (ESG) criteria and B-BBEE as part of their supplier selection processes”. Funds that haven’t done so yet will, therefore, need to engage more deeply on BBBEE policy developments and how they should respond in 2020.

As a responsible business and a long-term steward of South Africa’s savings, Old Mutual Investment Group (OMIG) has an important role to play in addressing the systemic challenges of poverty, inequality and unemployment in South Africa. In addressing these challenges, there are critical elements that require focus and attention. Namely, inclusive economic growth, societal transformation and building a sustainable future in which our stakeholders and communities live and operate. There is a direct correlation between the prosperity of South Africa and that of our clients. So, for us, transformation is not just a moral requirement but a business imperative.

OMIG is certified as a BBBEE Level 2 contributor. Although this rating is important, we believe transformation goes beyond ratings and is also about changes in mindset and the true integration of diversity in a business. Our pursuit of investment excellence, and commitment to a future that matters, compel us to drive transformation wherever and whenever we have influence as an enabler of economic activity, a custodian of the nation’s savings, and as a progressive employer.

With that as background, we view transformation for a South African investment management business, like ourselves, as primarily being about four elements:

1. Diversity and demographic representation amongst business leaders and investment decision makers in the organization. This is because of the importance of a diverse and inclusive leadership in transforming the organisational psyche to that of authentic inclusivity in the way investment excellence is achieved.

2. Black and Women Shareholding, which speaks to equitable and inclusive participation in the economics of an industry responsible for managing the country’s savings.

3. Active Stewardship with respect to Transformation in investee and portfolio companies. For example, at OMIG our team of ESG specialists actively engage companies we hold in client portfolios on their diversity and inclusion policies and black economic empowerment strategy, with a view to creating a broader impact on the economy with respect to transformation.

As an industry, we have a responsibility and opportunity to ensure that sustainable business practices, of which embracing transformation is critical, are embedded in the assets we invest in on behalf our clients.

4. Targeted investments in assets and portfolios that are aimed at producing transformative outcomes in society, alongside investment return. For example, portfolios that invest in schools that provide affordable quality education, or portfolios that provide affordable housing for communities. Such investments, whilst providing decent inflation beating returns for investors, have a very meaningful, measurable and truly broad based social and transformative impact on our society.

As OMIG, we take our role and responsibilities in society very seriously when it comes to transformation. We acknowledge that we still have some way to go on a number of the elements discussed above, but we also do celebrate a number of significant strides and targets we have achieved to date.

As retirement funds deal with how to implement the BBBEE related regulations coming their way, they must consider transformation and BBBEE from a holistic point of view given an asset manager’s role and responsibilities in society. It is as critical to transform and promote greater inclusion and diversity in our broader economy and in communities, as it is to transform and promote diversity and inclusion internally in our organisations.

FUTURE GROWTH: Expert Opinions: Edition March / May 2020

Why does ESG matter in fixed income? What are we doing about it?

Angelique Kalam, Manager for Sustainable Investment Practises at Futuregrowth Asset Management, provides the answers.

There are four important reasons to consider environmental, social and governance (ESG) factors when making fixed-income investments. In short:

1. It’s our legal duty to consider ESG factors;

2. The world is heating up, and investors know this;

3. We ignore ESG factors at our peril;

4. As asset managers, we have the power to make a real difference.


1. We have no option. It’s our legal duty to consider ESG factors as stated in Regulation 28 of the Pension Funds Act.

Regulation 28 says that we must “… give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social or governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.”

The Act further urges further that we must “… before making an investment in and while invested in an asset, consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character”.

Therefore, as fiduciaries and custodians of our clients’ funds, we have no option but to consider ESG factors when both assessing and managing investments – to ensure that we identify risks that could potentially erode value, and to price for these risks so as to earn sustainable risk-adjusted returns on behalf of our clients.

2. Too hot to handle (the world is heating up – and investors know this)

Global warming could actually be approaching the point of no return – with visibly rising temperatures, melting ice and altered climates. The ability to plan for the future has dropped from decades to mere years. Time for consideration of the necessary changes in humanity’s behaviour is running out.

Apart from the extreme weather realities experienced on every continent, scientific evidence for climate change has multiplied and become more accessible and sophisticated. Demand for urgent change in the behaviour of governments and other institutions has become the clarion call of millennials around the world. This is a signal of things to come, in terms of the demands and expectations of investors of the future.

(For a more in-depth analysis, see

3. If you are aware of a problem and do nothing, you become part of the problem (we ignore ESG factors at our peril)

We cannot continue to ignore ESG factors. There is no shortage of examples of a lack of governance – and the impact this has, particularly amongst South Africa’s State-Owned Enterprises (SOEs) amongst others.

In his 2020 State of the Nation Address, President Cyril Ramaphosa referred to “years of state capture, corruption and mismanagement”; “Eskom’s inability over many years – due to debt, lack of capacity and state capture – to service its power plants”; and that “the extent of capture, corruption and mismanagement in SOEs is best demonstrated at South Africans Airways, which was placed in business rescue late last year”.

Governance issues are not limited to SOEs, as evidenced in governance failures at African Bank and Steinhoff locally, and high-profile Volkswagen and Enron debacles in the past, to name a few. These have wiped out share values and, in some cases, destroyed lives.

ESG risks cannot be underestimated, and can certainly not be ignored. A proactive stance from fixed-income investors (and all investors) is called for. This can take many forms (as will be seen below) from mindful deal selection and due diligence, to unequivocal demands and monitoring of the ESG compliance of investee companies.

(For some case studies on dealing with governance in the SOEs, see newsroom/guidance-and-case-studies-for-esgintegration- equities-and-fixed-income/)

4. Reforming the “status quo” (as asset managers, we have the power to make a real difference)

ESG crises can create political risk, such as the populist backlash against “the status quo”. Capital providers (investors) invariably represent the “status quo”, and thus face risks of uncertainty, expropriation, taxation, and protectionism. Channelling capital with this in mind is both responsible and defensive.

Managers therefore have no excuse when it comes to applying due care and diligence in the ESG risk analysis of their investments. As stated above, this forms part of our fiduciary duty towards our clients.

Asset managers are beginning to realise that ESG aspects can become an additional set of analytical risk tools on which to build sustainable and competitive investment processes. If viewed through a riskavoidance and return-seeking lens, there should be no compromise of investment returns.

A plethora of guidance principles, frameworks and codes are available to the investment universe. To name a few:

– King IV Code

– Code for Responsible Investment in South Africa


– UN Principles for Responsible Investment (PRI)

– UN Sustainable Development Goals (SDGs)

There is a growing trend in the industry to move beyond the simplistic goal of “making money” toward “making money and being a positive force in the world”. This implies a wider role and duty by participants, that demands more varied analyses and better decision processes.

Culture is a competitive advantage in building robust decision processes, but also in attracting clients and employees. It is worth noting that by 2025, Millennials will make up 75% of our workforce. The shift towards seeking a sense of purpose in our work has already started.

What are we doing about it (the Futuregrowth example)?

Futuregrowth’s approach is to integrate sustainable ESG best practices when assessing companies and engaging them on their practices – understanding that these are key components in managing investment risk and that ignoring ESG issues can have a negative impact on risks and rewards, ultimately affecting client returns.

As such, ESG screening and analysis form part of our fundamental credit analysis process across our wide range of fixed-income sectors. We use a variety of tools and inputs for this purpose. These are constantly modified as new learnings arise.

The fixed-income asset class is complex due to the wide variety of issuers, and therefore there is no ‘one-sizefits- all’ solution to analysing companies on ESG issues. Analysts have to apply their acumen and judgement, and there will be variances in our approach to, for example, issuers in the listed sector versus those in private (unlisted) debt.

We also recognise that companies are at different stages in their business lifecycles and we have to be realistic in our requests regarding specific ESG recommendations. We therefore engage with companies to reach a mutually agreed outcome that will benefit both parties, with the goal of improving the sustainability of their business.

How do we protect our clients’ funds?

An integral part of our process is to embed strong protections for our clients wherever possible.

Through our large skilled credit team, we are able to negotiate specific terms in loan agreements, such as requiring borrowers to report timeously on any material events that could affect the credit quality of the loan.

On these occasions, we engage with the borrowers to ensure that the risk is minimised as far as possible, and, importantly, that long-term, proactive strategies are devised and implemented to manage the risk and the impact on future revenues. Learnings from these events are shared internally and applied across all our investments, where applicable, to the ultimate benefit of all our clients.

In the case of private (unlisted) debt, we stay involved throughout the term of the loan, often receiving monthly management accounts and attending quarterly meetings where we have the opportunity to engage with management on an ongoing basis. Where appropriate, we participate in various committee meetings conducted by the company (e.g. lenders’ committees, boards) where we engage with senior management on any issues of concern.

Through our collaboration with the Association for Savings and Investment South Africa (ASISA) and other industry and public forums, we also seek to raise standards in the domestic bond market by advocating reform that improves protections for our clients.

Our primary objective is to earn sustainable, riskadjusted returns for our clients. We believe that our focussed and dynamic approach has set us apart in this field. We take pride in adding value to our clients’ portfolios by integrating ESG analysis into our investment processes, assessing and pricing for related risks, and actively engaging with borrowers to ensure the sustainability of their businesses and the environment.

The power of capital to effect change – we have an important role to play

It is clear that the days of ESG veneering and tick-box reporting are over. Investors need a comprehensive set of ESG risk measures to avoid or price for these risks, so as to reduce portfolio risk over the long-term.

It is easy for fixed-interest managers to assume that the “the Board is watching” these matters. Instead, we need to constantly apply critical thinking and judgement to our investments. We have the capacity to assess and strengthen corporate governance standards far beyond the Board of Directors.

Our choices about capital deployment have real-world consequences. We can make a positive difference if we choose to do so and we should not underestimate the power of capital to effect meaningful change.

Published on Futuregrowth is a licensed Financial Services Provider