Prabashini Moodley, Managing Director: Old Mutual Corporate
Retirement savers’ already limited local investment universe has diminished even further with the news that African Oxygen (Afrox) will be delisting from the Johannesburg Stock Exchange.
This follows news that Grit Real Estate and Intu Property will be leaving the stock exchange, reducing the number of listed shares on the bourse to less than 350, from more than 600 in 2001.
The smaller pool of listed investment options presents a concentration risk for people saving towards their retirement, which is why recent calls for increased infrastructure investments by retirement funds may be good news for South Africans saving towards their retirement.
Infrastructure assets are less volatile than equities and show a lack of correlation with your traditional assets like property. Moreover, they deliver inflation-beating returns over the long run if properly structured and properly managed.
Alongside equities, infrastructure offers members in retirement funds decent diversification, particularly in the context of the comparatively small local equity markets.
Calls for Treasury to enable retirement funds to increase their exposure to infrastructure is not to be confused with the concept of prescribed assets – the controversial proposed law that would force retirement funds to invest in specific government-approved instruments.
There is ample evidence that the previous prescribed assets regime in South Africa — from the ’50s to the ‘80s when it was abolished — was detrimental to fund members.
This is because one of the main problems with prescribed assets is that if the assets in question had sufficient investment merit, they wouldn’t require a prescription. Artificially increasing the demand for these assets results in a lower expected future return for the member. And when the owner of the asset is assured of funding, there is no financial incentive to perform.
According to the South African Institute of International Affairs, the private sector’s investment into African infrastructure represents only 2.8% of all investment into the asset class. Moodley says that the mismatch between potential and committed exposure is an indication of the opportunity that could unlock long-term benefits for the country and investors alike.
Given that most retirement funds are currently permitted to invest in infrastructure yet remain underexposed, would a change to Regulation 28 be a sufficient catalyst for investment?
Infrastructure projects tend to have some unique characteristics, and the investor’s understanding of its role in the portfolio is an important driver of investment. Understanding what’s required to help trustees to make an informed decision or what mechanism would be an appropriate catalyst needs to be interrogated further.
Currently, Regulation 28 limits the type and amount of exposure of retirement funds to a maximum of 75% in equities, 25% in property, 25% in foreign investments, 5% in Africa, as well as 10% in hedge funds or private equity, and up to 10% in unlisted equities. Increasing an allocation towards alternative assets could allow funds to allocate as much as 25% of assets under management to infrastructure projects.
Old Mutual Absolute Growth Portfolios currently allocates just over 8% of funds to infrastructure projects seen as impact investments that seek social or environmental effects in addition to financial gains.
The pricing and investment merits of these assets aren’t artificially skewed by excess demand, and the question, therefore, is whether increasing limits could encourage more investment into these types of projects without undermining returns.
Post the Covid-19 pandemic, South Africa will desperately need a catalyst to stimulate the economy. Unemployment is at a record high and youth unemployment is north of 50%. In my view, the Covid-19 crisis has exposed the under-investment in some parts of the country and the extent of the infrastructure backlog.
This investment would help people get access to basic services such as road networks and bridges, hospitals and schools that help to improve the quality of their lives and their future prospects. The market is still comparatively small in South Africa, but future growth and long-term infrastructure offtake agreements should deliver long- term real returns.
Trustees and advisers to retirement funds should actively seek out opportunities to learn more about this topic and seek out specialist investment advice to make informed decisions.