Edition: September / November 2015
Editorials

CURRENTS

Scored for sustainability

Top marks for data compilation and corporate rankings to drive
higher disclosure standards. Some companies might squirm at the
new SDTI research findings but investors can have the last word
in comparing them with the revamped JSE SRI index.

Since its inception in 2004, the JSE Socially Responsible Investment (SRI) index hasn’t exactly shot out the lights. It’s been a nice-tohave, more for companies wanting to bask in their inclusion than for investors using it as a serious tool to assess compliance with King III on environmental, social and governance (ESG) criteria.

As a showcase, not requiring the most robust interrogation, the SRI index could hardly have helped much more than to promote awareness of what the JSE describes as “sustainability considerations”. Now the index is taken to a higher level by the JSE partnership with FTSE Russell, the global index provider, to extend the “range, depth and breadth of techniques to apply ESG factors within the investment process”.

The intention is to cater better for the needs of institutional investors. SA pension funds, for one, are required by regulation to consider ESG in their investment-making decisions. They’d need to look closely at the new JSE offering.

To do their jobs properly, they should look more closely still at the volume of vigorous research – independent, challenging, informative and provocative – annually produced by the indefatigable Michael Rea of his self-styled Integrated Reporting & Assurance Services. Rea is a man on a mission to light fires under the feet of company reporters who deal in platitudes.

His beautifully-illustrated 254-page report for 2015, styled the Sustainability Data Transparency Index, is distinctly unbeautiful for bad reporters. No punches are pulled in the commentaries.

By the same token, he highlights the better reports and explains why. He delves into all JSE sectors and companies, whether or not they cooperated with him, and produces a wealth of tabulated rankings – from best to bad – across the range of ESG criteria.

It wouldn’t be right to attempt a summary because such an attempt would ignore context, save to say that the comprehensive data (quantitative and qualitative) compare like with like and the conclusions are controversial. But it certainly would be right to test them against whatever the JSE-FTSE Russell Emerging Markets ESG Index produces.

Higher standards of disclosure, with more materiality and less marketing, stand to be enhanced -- right through the gamut of carbon emissions, water usage, labour relations and remuneration practices – provided the SDTI gets the attention it deserves from companies and investors alike.

Clever move

MMI’s flamboyance of jargon – about its “client-centricity” which has “set financial wellness as our core value proposition” under “the outcomes-based investment strategy” and “centre of excellence” model– is a circuitous route for getting to the point. It’s that MMI actually has differentiated itself from life-assurance competitors, not only by spinning out a part of its assetmanagement business but also by turning the unit into majority black-owned and controlled.

Mabuza . . . track record

An immediate effect is that MMI will take a leap up the Financial Sector Charter scorecard for black economic empowerment on two fronts. First, MMI assists the financing of a management buyout led by current Momentum Asset Management chief executive Sibusiso Mabuza. Second, it supports the business by allocating assets for it to manage. Taking a share in the new unit, MMI describes it as the first step in further partnerships with “independent” asset managers. Thus, through its share in this unit alone, MMI should additionally gain by the business likely to be attracted from institutional investors seeking to increase their level of BEE compliance. After all, the Mabuza-led team already has credentials in place.

For the team, “independent” can have several meanings. Amongst them could be independence from the remuneration policies of a life office to something more akin to the incentive structures that apply at Coronation, Allan Gray and Investec Asset Management; hopefully with similar performance to follow.

For the industry, it will mean careful scrutiny of the competitive implications. The possibility cannot be excluded of rivals adapting the MMI initiative. To the extent that they do, over the longer term is could spell the end of an era for SA assurers; where the asset-management function is distanced from their control, enabling them primarily to be takers of risk and providers of portfolio wrappers.

Good start

After the build-up by the ANC Gauteng for the launch of its processes for stakeholder inputs on the role of retirement funds in economic transformation (TT June-Aug), the first of its consultations had elements both encouraging and discouraging.

Encouraging was the representative cross-section of attendance at the function, held at the JSE, in July. Encouraging also were the tone set by ANC Gauteng chair Paul Mashatile, the constructive suggestions from panellists who included Eskom Pension& Provident Fund chief executive Sdu Luthuli and Institute of Directors chief executive Ansie Ramalho, and the summing up by deputy finance minister Mcebisi Jonas.

There was also vigorous participation from the floor. Two examples: With so much burden already on trustees, just to ensure that their funds were efficiently run, a principal officer wanted to know how their duties could practically embrace shareholder activism too. And with such heavy weightings by pension funds in government bonds, an institutional investor argued, the activism urgings should extend to debt instruments (calling government to account) and not be limited to equities alone.

Discouraging was the reversion of a few trustees to the old chestnut of prescribed assets. One even stated as fact that prescribeds had worked previously (like when?), so there was no reason that they shouldn’t again (to achieve what?). No panellist had raised or addressed the possibility of prescribeds being introduced, media reports merely having inferred it from a subsequent interview with Mashatile.

Expect progress reports during further stakeholder interactions after the meeting of the ANC national general council in October. In the discussion documents so far on the table, not a word is said either about public-private partnerships or about encouraging pension funds to invest directly in infrastructure.

It’s all the more reason that they should try to find out how much of their indirect investments, through government bonds, are actually being allocated to development as opposed to the current-account deficit.

Unintended consequence

Part of retirement reform is National Treasury’s push for pension funds to consider more seriously the cost advantages of passive investment. Against this comes a recent Bloomberg report related to the US and possibly applicable also to SA. The dark side of exchange-traded funds, according to research by three business schools, is to erode active managers’ outperformance.

The research, looking at ETF ownership patterns of US stocks between 2002 and 2011, found that growth in ETF assets was responsible for increases of around 6% in the trading costs of companies’ shares where ETFs were invested. It reckoned that, as passive managers lock up increasing proportions of underlying equities, the number of shares available to other traders reduces. The costs for active managers therefore increase.

These higher trading costs are a deterrent for active managers, reducing the incentive for stockpickers to trade those stocks in response to company news. The huge inflows to ETFs could be a factor in explaining why active managers aren’t beating the market – further stimulating ETF inflows – and causing distortions in share prices.

Gnashing at Nash

Slowly and sporadically, more curatorship reports are dripping onto the FSB website. One, at last, is the report of curator Tony Mostert on the Cadac pension fund at May 28 2014. Mostert says that it must be read in conjuction with his report at January 31 2014, but this is impossible because it doesn’t appear on the website.

The Cadac curatorship has been nothing if not protracted and complex, satiated by Simon Nash’s still-unresolved criminal prosecution and seeminglyceaseless civil litigation (TT March-May ’14).


Mostert . . . revealing figures

Some key numbers from the Mostert report:

  • About 700 fund members will have an interest in the surplus apportionment (which had been avoided by Nash’s “fraudulent and fabricated transactions”);
  • Improper use of the surplus amounted to R4,5m in Feb 2011 (with an estimated value of R7,8m in May 2014);
  • The fund is in a sound financial position. It had total cash assets of R67m in April 2014 and an excess of assets over liabilities at more than R30m in Feb 2011;
  • Total curatorship costs so far run to R26,7m (including legal fees during the “passed” three and a half years).

Mostert is continuing to pursue outstanding claims of R30m excluding the recovery from Nash of wasted costs.