Issue: March/May 09


Strange silence

The weeks pass, then the months, and still there’s no word from the Public Investment Corporation on its appointment of external private-sector asset managers to actively manage portions of its huge portfolio. The announcement is keenly awaited, partly because of the fees that an appointment will attract and partly because of the prestige it carries, but also because this is the first time that the PIC has put the appointments to open tender (TT Dec 08-Feb 09).

Since the process seems to have been concluded, the silence is curious. By last November, various managers already had a pretty good idea of whether they were in or out. Earlier this year, apparently, managers who’d been selected were officially informed. Since then, it hasn’t been too difficult to work out who hasn’t been selected.

This is where interest now focuses. When the PIC makes its announcement, expected only in April, could it please disclose who has been selected, what proportions they will respectively manage, who has not been selected, and, critically, the reasons for its conclusions?

This would be helpful to the industry and investors alike; the industry because the tender is so competitive and investors because they’ll be exposed to the winners’ marketing. A PIC imprimatur will be like a stamp of who’s best, so transparency on the PIC’s thinking will enable the marketplace to make up its own mind.

As an aside

The PIC manages assets of the Government Employees Pension Fund, by far the PIC’s largest client. Shares owned by the GEPF are registered in the name of the PIC, which causes the PIC to be seen in the front line of promoting shareholder activism and socially responsible investment. Both are areas in which the GEPF is increasingly involved.

Were the shares registered in the name of the GEPF, as provided by the 1996 Government Employees Pension Law, it would be clearer between the GEPF and the PIC which is the tail and which is the dog.

Old mutts at Mutual

Directors who spearheaded the overseas expansion of Old Mutual, several long gone with their share options, have caused a frightening destruction of shareholder value. So long as the present OML structure remains, the hardworking executives in Pinelands haven’t a hope of reversing it.

As TT went to press, OML’s results were imminent. The big boys in London have a lot to answer for. What they say will be keenly scrutinised for proposals to generate cash for the international group.

Over the past 12 months the OML share price has fallen almost 70%. Pale by comparison are the declines of 15% at Sanlam and 22% at Liberty.

On February 24, to take a recent date, the OML market capitalisation was R32bn. Strip from it the 58%-owned Nedbank (market cap R36bn) and 85%-owned Mutual & Federal (market cap R4,3bn), and the OML market cap reduces to around R12,7bn.

Contrast this with the R33bn market cap of Sanlam. In other words, OML is priced at much smaller than Sanlam although Old Mutual in SA is bigger and profitably supplies OML with the bulk of its revenues. The reason for the unflattering differential can only be that the market has priced the OML offshore subsidiaries at a whopping negative.

The market’s eyes will be on OML, and its directors, for a while yet.

OML Goes Down

Providence for providents

In his Budget speech, Trevor Manuel contemplated the phasing out of provident funds (where a member on retirement can take his whole benefit in cash, as opposed to a pension fund where he must use at least two thirds to buy a pension). The idea is to prevent cash splurges at the expense of pensions provision.

Savings already in provident funds will probably be unaffected. This would help members who rely on their retirement savings to pay off housing loans, for example.

But it could create problems, during the phasing-out process, if existing provident-fund members have to be in pension funds too. Double memberships would increase administrative costs, warns Craig Aitchison of Old Mutual, and make tax administration more burdensome.

A period of consultation and communication will precede final decisions.

Madoff escapes

SA investors seem to have escaped the clutches of mad Bernie. Ploughing through the hundreds of client names released by the liquidator of his defunct New York firm, only one SA name appears. It’s the old JSE stockbroker Rice Rinaldi, later absorbed into what’s now Imara S P Reid.

Apparently, Rice Rinaldi dealt with Madoff in the 1990s when Vernon Rice and Ralph Rinaldi were partners. The deals were settled with American Depository Receipts. They were arbitrage deals, explains an Imara spokesman, and no money was ever left with Madoff.

Have all SA investors escaped? Not necessarily. They might only have escaped being identified. This would have happened if they’d invested via asset swaps through offshore institutions. Beneficial holders of institutional accounts aren’t listed. It’s said that some half-dozen wealthy SA families rue the day Madoff granted them the privilege of taking their money.

There’s no intimation in the lists that any SA retirement funds, which can invest a proportion of their funds offshore, were duped into Madoff. It would nevertheless be as well for trustees to check that they didn’t get there via any of the many feeder funds operated by the most reputable institutions, which were duped.

King’s subjects

There’s much to digest in the King III draft on corporate governance. For retirement funds, as company shareholders usually through institutional nominees on fund mandates, three topics immediately stand out:

  • The board must put the company’s remuneration policy to shareholders for approval. By majority vote at the agm? If the policy is rejected, how will it affect the authority of the board to run the company?
  • Non-executive directors’ fees should be approved by shareholders in advance. By what mechanism? A series of informal engagements where some shareholders might approve and others not?
  • Shareholders are ultimately responsible for composition of the board. How is this responsibility to be exercised? Is it suggested that shareholders nominate individual directors of their choice, irrespective of whom an incumbent board proposes, and that they vote directors in or out? What would be the consequences if different shareholder groupings, acting as owners not necessarily in collusion, find themselves in control?

Ghavalas off the hook

The National Prosecuting Authority operates in mysterious ways. Erstwhile merchant banker Peter Ghavalas, considered the kingpin in the illegal stripping of surpluses from pension funds, has been allowed a plea bargain whereby he repays R18,6m of his gains and becomes a state witness against lesser participants.

That the NPA has decided to withdraw the Ghavalas charges must leave the Financial Services Board hopping mad.

FSB’s teeth

The new enforcement committee of the FSB is ready for its first meeting. Extending functions of the committee that deals with abuse in capital markets, this body will consider non-compliance and contravention of all FSB legislation.

The committee is able to impose fines in unlimited amounts. It can also make compensation orders and award costs. Major advantage, points out FSB executive officer Dube Tshidi, is that it will be able to deal with matters much more speedily than in a court of law (TT Sept-Nov ’08).

The committee is chaired by Frikkie Eloff, retired judge-president of the Transvaal, supported by six deputy chairs including two retired judges and a senior counsel. Among the 13 other members are two former FSB executive officers, Rob Barrow and Rick Cottrell.

It’s likely that many of the cases will relate to non-payment by employers of their contributions to company pension funds.

Mort... plenty on his plate
Mort... plenty on his plate

Problem solved

A specialist pensions lawyer appointed to the FSB enforcement committee is Jonathan Mort. He recently resigned as a director of Edward Nathan Sonnenbergs, one of SA’s largest law firms, to set up a practice of his own.

His reason is to avoid interest conflicts. At times, his focus on the legal needs of pension funds brought him against other ENS directors who act for employers and service providers. “This problem is likely to grow in the future,” Mort anticipates. He’ll remain a consultant to ENS on pension matters so long as they’re independent of his own practice.

In the new firm he’s being joined by ENS colleague Vanessa Bell.

Slow’s the word

Nine years on and still no charges have been laid for personal expenses allegedly paid by the SA Commercial, Catering & Allied Workers Union provident fund to certain trustees and the fund’s principal officer. Having inspected the fund, in 2000 the FSB handed its report to the National Prosecuting Authority and lodged a complaint with the police.

Asked for an update, fund curator Tony Mostert responds: “As I am currently involved in enquiries I will only be in a position to revert to you in due course.”

Out of court

The pensions-payout battle between Investec Employee Benefits and 13 trade unions affiliated to Fedusa, waged as much through the courts as the media (TT Dec ’08-Feb ’09), has been settled. Without an admission of liability, IEB has paid the union funds an undisclosed amount that is fully covered by IEB insurance contracts with Lloyd’s of London syndicates.

The matter was residue from Investec’s 2001 takeover of Fedsure.

Relative relief

Small consolation perhaps, but the equity portions of SA retirement funds wouldn’t have performed nearly as badly as in most other markets.

Looking at the FTSE index series for the 12 months to end-January, in US dollar terms the all-world index (total return, including capital) was down 42,1%. SA, down by 37,8%, was roughly in line.

But then check it in local currency. The SA decline was a mere 14,6%. Only Colombia and Chile had lesser declines.

So the glass is either half full or half empty, depending on how you prefer to view rand weakness.