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GEPF looking to increase offshore exposure

Nov 01 2017 10:26
Lameez Omarjee

Johannesburg – The Government Employee Pension Fund (GEPF) is in consultation to increase its offshore exposure as it is highly exposed to domestic markets, with its performance closely correlated with that of the economy, principle executive head Abel Sithole said on Tuesday.

He was speaking at a briefing about the GEPF’s investment processes, alongside Dan Matjila, chief executive of the Public Investment Corporation (PIC), which is the fund’s primary investment agency.

With R1.67trn worth of assets, 1.3 million active members and over 400 000 pensioners and beneficiaries, the GEPF is the largest pension fund in Africa.

The briefing comes after much interest stimulated by media reports suggesting that the fund could be drawn upon, through the PIC, to bail out underperforming state-owned enterprises (SOEs) such as South African Airways.

On these claims, Matjila affirmed that the PIC’s investment mandate comes from its clients, in this case the GEPF. The GEPF prescribes the parameters of its strategic allocations.

He said that National Treasury has no say on the investment mandates of its clients.

“From where I sit, all I can say is that client monies are safe,” Matjila said.

Sithole unpacked these strategic allocations and their ranges. A significant portion (49%) of asset allocations are made to domestic equity, while only 5% are made to foreign equity. Domestic bonds account for 34% of asset allocations, and foreign bonds for only 1%.

Sithole said the GEPF is in discussions with the minister to improve exposure to foreign allocations. These discussions will hopefully be concluded before the beginning of the next financial year.

“Our investment offshore is significantly low,” he admitted.  But the “heavy domestic bias” has stood the GEPF in good stead so far, he explained.

Sithole warned that the assumption that offshore investment will yield good returns is not always true. But the impact of a credit downgrade on the GEPF is a concern. “The fear is that we might be downgraded sometime next year. As South Africans, we must be working hard to make sure we are not downgraded."  

Asset allocations as at March 31 2017

On investments on government bonds, Sithole explained that these were the most secure as government provides the “backstop” of underperforming funds by covering shortfalls with tax revenue.

Sithole said efforts are being made to diversify risk by investing in other instruments such as cash and bonds of both government and corporates.

Corporate bonds include Standard Bank, FirstRand, Nedbank, ABSA and Investec, among others. SOE bonds include Eskom, the South African National Road Agency (Sanral), Transnet and Airports Company South Africa.

Eskom’s bonds account for 15% of total bills and bonds, compared to Sanral and Transnet which each account for 4.5%.

In total, corporate bounds account for 6.7% of total bills and bonds, while foreign bonds account for 3.4%.

Sithole justified investments in Eskom and Sanral for their long-term benefits for future generations, as part of its environmental, social and governance (ESG) considerations.

“People get concerned over investments we make in Eskom and Sanral."

He explained that Sanral supports national roads in the country. “If Sanral fails, the whole logistical environment in South Africa will fail.”

He also said that the country depends on the energy provided by Eskom for the economy to thrive. “If Eskom fails, the whole of the South African economy fails.”

Eskom was a good company

“Not long ago, Eskom was a good company,” Matjila said. “Going forward, we realise that we will have to change course.”

Matjila said greater intervention by the PIC is needed to address governance at Eskom and other SOEs.

“We are finalising a document of how we are going to approach SOEs. We will share with clients and key stakeholders to inform them how we will invest in SOEs going forward.”

Sithole confirmed that there was engagement on governance issues. “The fact that we don’t use (a) megaphone for discussions does not mean there is no engagement,” he said. 

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