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Prescribed assets - 5 questions answered

Jan 26 2019 11:40
Kirk Swart, Overberg Asset Management
Many assumptions have been made regarding the ANC's planned investigation into the introduction of prescribed investments for pension funds.

At this point, however, it is still a very vague statement, not clearly defined. The problem with this – and with such ill-defined statements in general – is that it creates uncertainty in markets.

As such, it is important to try to understand why the ANC would consider such a drastic step, and what the outcomes might be.

Below are a few of the burning questions.

Why would the ANC try to prescribe to asset managers where to invest one's hard-earned pension money?

The answer is quite simple. The government needs money. For the government to fund their projects and keep state owned enterprises (SOEs) afloat, they require billions of rands.

These SOEs can generate the needed revenue themselves. Should they fail to do so, however, as is the case with almost all state-owned enterprises, taxpayers normally foot the bill.

The 'prescribed asset' investment parameters referred to in the ANC manifesto is just another way of alleviating financial pressure on those SOEs.

Will investors see any return on the prescribed investments?

Capital markets function very well, and capital will flow to where it can get the best risk-adjusted return. It is possible that investors can receive a return on the prescribed investment, should the underlying fundamentals of the investment be solid.

Cape Town recently offered its first ever 'green-bond', which was oversubscribed, and the market loved it. Green Bonds, also known as climate bonds, are specifically designated to be used for climate or enviromental projects. The bond was R1bn and earmarked for green sustainable projects.

The fundamentals of the bond are good, as they are typically asset-linked, and the market has faith in the ability of the City of Cape Town to meet its obligations.

Therefore, in the case of SOEs, if the SOE is profitable and well run, government won’t need to prescribe pension funds' money to invest in them. They will attract the needed capital based on favourable fundamentals.

As things stand, it looks like throwing good money after bad money.

Can we learn from the past?

In the late 80s, the South African government implemented prescribed investments that forced pension funds to invest 53% of their assets into parastatals and government bonds.

The forced investment parameters did not work so well, as taxpayers ended up covering the pension fund liabilities while international funding dried up. Experience shows that most prescribed investment policies have failed investors.

What does the ANC stand to gain politically from such a move?

It is hard to believe this is a populist move. It is hard to foresee what the ANC stands to gain on a political front.

One can argue that the electorate will indirectly benefit from projects that the ANC will successfully complete, which will result in in a 'better off' society. However, this seems unlikely.

What should investors do?

It is very important to note that nothing has been decided yet and that there is a very long way to go if such policies are to be implemented. Investors should not panic, and should stick to their financial plan.

Investing your portfolio into a spread of global assets does help to mitigate such risks and any household should have at least 30% of their assets invested offshore.

Kirk Swart is an investment advisor at Overberg Asset Management. Views expressed are his own.

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