Edition: October / December 2016


Maybe for King V

UK proposal for ‘radical economic transformation’ of company boards. It should set SA pension funds thinking whether, as shareholders, they will support a similar move here.

In many respects, SA company law and governance tend to follow the UK. So heed a particular focus in the landmark speech by Theresa May immediately before her election as Conservative Party leader and UK prime minister:

May . . . local resonance

I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders.

In practice, (non-executive directors) are drawn from the same, narrow social and professional circles as the executive team. As we have seen time and again, the scrutiny they provide is not good enough.

We’re going to change that system, and we’re going to have not just consumers represented on company boards but employees as well.

It’s too late to debate for King IV. But if or perhaps rather when the UK does move in this direction – not entirely new ground because it smacks of the German model, similar to proposals on the agenda of the Gauteng ANC (TT June-Aug ’15)– then expect that it will gain momentum in SA too.

Hitting the spot

By its suspension of new loans and negotiations for the rollover of R1,8bn in debt finance to some of the largest state-owned enterprises, asset manager Futuregrowth has shown how seriously it takes the G in ESG. Consideration of environmental, social and governance factors are at the heart of the responsible investment (RI) concept, further underpinning the fiduciary duties of those charged with caring for other people’s money.

Having duly considered the ESG factors, as the preamble to Regulation 28 under the Pension Funds Act requires, and having autonomously concluded that in the ”shifting circumstances” it was ”difficult to make a reasoned and defensible decision to continue providing additional funding to the SOEs from client funds until we have reassessed the veracity of the SOEs’ decision structures”, Futuregrowth really had no choice than to act as it has.

The more attention it generates, the better. It forces all fiduciaries for investors’ interests to evaluate their own commitments to RI.

Controversy relates less to the principle than to whether Futuregrowth was right in its original approach, subsequently revised, to have gone public on its stance prior to ”engagement” with the various SOE boards. A number of other fund managers – Aluwani and Abax are known to be amongst them – have admitted to gradual reductions of certain SOE exposures.

Given the current confrontations inside and outside the cabinet over government’s contradictory economic policies, is an asset manager’s behind-the-scenes discretion preferable to open disclosure? Be informed by the Code for Responsible Investing in SA that King endorses and that asset managers have voluntarily signed: ”Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.”

Solid progress

Judging by the recently-released results of the latest Investment Solutions RI survey, there should be a wealth of underlying support for an asset manager that sticks its head above the parapet. The fourth in these annual surveys, which gauges the behavioural approach of fund managers by tracking their progress towards integrating ESG factors in their investment decisions, the responses of 56 fund managers (34 of them South African) were collated. Amongst the key findings:

  • Some 88% of local and 86% of global fund managers believe that the weighting up of ESG factors results in a better assessment of risk;
  • The great majority of fund managers would avoid buying shares in companies (the same logic doubtless applying to bond purchases too) if there were serious ESG concerns;
  • Whereas previously fund managers placed a greater weighting on governance factors, there’s now a more holistic approach to all ESG factors;
  • A barrier to RI is a lack of reliable and accurate ESG information.

All the more reason, then, that the managers independently apply their own minds and act accordingly. The SA industry is contorting over a high-profile example of words becoming deeds.

Unfair to shareholders

The pursuit of justice can cause injustice. It often happens, and this time in spectacular fashion, with administrative penalties that the Competition Commission imposes on companies. Take the R1,5bn that ArcelorMittal SA must pay effectively in fines.

It’s actually the guiltless shareholders, indirectly but significantly including pension funds through asset managers, who pick up the tab. Directors, ultimately accountable for the contraventions, walk away financially unscathed.

In theory, shareholders should seek recourse by suing the directors (who might or might not have insurance cover). In practice, however, shareholder actions against directors rarely eventuate.

AMCA admitted guilt on two counts, of price fixing and information sharing with competitors, that the commission had begun to investigate respectively in 2008 and 2009. Another four matters, one going back to 1999 when the company structure and board were totally different, were settled by AMCA agreeing to certain restrictions on profit margins and committing to a defined minimum of capital expenditure.

The upshot is heavy stuff to be borne by AMCA shareholders. At end-2015 they included Investec Asset Management, Coronation Fund Managers, the Industrial Development Corporation and the Government Employees Pension Fund.

Liberty’s property leap

Sandton landmark

Tested and proven for capital appreciation and income stability is Liberty’s glamour portfolio of regional centres in Guateng’s most affluent urban areas. Liberty will partly put these centres into a real estate investment trust (REIT) that, once pricing details are revealed, must seriously interest pension funds as potential investors.

On a successful listing later this year of the REIT, to be known as Liberty Two Degrees, Liberty expects the value of its existing R30bn property portfolio to increase by 3%-5%. The REIT, managed by Stanlib, is expected to comprise a R10bn portfolio i.e. R6bn worth of properties in the existing Liberty portfolio plus a targeted R4bn capital raise on listing.

There’ll also be a new Liberty Real Estate Portfolio, a property fund that will invest solely in the shares of Liberty Two Degrees. On a limited basis and on preferential terms, customers of Liberty will be able to convert to it all or some of their existing holdings in the currently unlisted property portfolio.

At present this portfolio’s retail component comprises the Sandton City complex (around 35% by value), Eastgate Mall (31%), as well as interests in Melrose Arch, Nelson Mandela Square and Liberty Midlands Mall (7% each).

On the JSE, roughly R400bn of equity is now invested in REITS. One factor in their popularity is that investors don’t need large amounts of capital for exposure to real estate.

Another relates to tax. REITS must pay at least 75% of their taxable earnings available for distribution to investors as dividends, giving them certainty that net income will be paid out, and there’s enhanced efficiency in that tax is payable by the end investor. These instruments are also highly regulated, with committees to monitor risk, and their prices are transparent.

What’s the downside? With a portfolio as retail-heavy as Liberty Two Degrees, there could be risks from a decline in consumer spending (impacting if not on lease renewals than on base rentals sweetened by turnover clauses), and by oversupply of retail space in primary catchment areas (such as the revitalised Rosebank and the recently-opened Mall of Africa). Longer term, a known unknown is the future traction of online shopping.

The new REIT will be able to borrow and raise equity for a dynamic expansion programme. Firmly in the sights of Liberty group chief executive Thabo Dloti are other regions in sub-Saharan Africa. Filled with confidence, he speaks of ”leveraging capabilities and skills across the group to deliver another innovative solution” from which retail customers and institutional investors will benefit.

Must read

From memory, there isn’t other literature as helpful to its target market than A Practical Guide for The Pension Fund Trustee; so much so that it should be the standard reference for training courses. Even experienced principal officers and trustees should keep it at their elbows for the ”practical guidance” that it certainly provides.

Henry Dul, the author, has generously drawn for his years of experience in the retirement-fund industry to compile a volume that is at once easily digestible and conveniently compartmentalised into chapters for optimal user-friendliness. Anybody needing a one-stop guide that simplifies the concepts, will find it here. It also provides objective answers to basic questions that one might be too embarrassed to ask, and then some.

Its purpose, explains the preface, is ”to provide guidance to trustees of pension and provident funds in making extremely important decisions, free from service providers and the conflicts of interest that service providers bring”. Topics covered are as comprehensive as they can be, from describing the different types of funds to duties of governance, dutifully indexed.

Running to 320 pages of uncluttered text, it’s available from henry.dul@vodamail.co.za for R295 including vat. It’s worth every cent.

Fit of pique

Launch of the financial regulatory system, known as Twin Peaks, is imminent. Public comments having been canvassed and considered by drafters of the Financial Services Regulation Bill, the Free Market Foundation has put in a last-minute plea for parliament to stop it.

The FMF is highly critical of the socio-economic impact assessment that had been undertaken to support the bill:

  • There is no clear study or articulation of the ”mischief” to be addressed and no empirical evidence of the ”problem” has been provided;
  • Compliance costs will be at least R4,5bn-R6,2bn per year. They’ll be passed on to consumers as a ”stealth tax”;
  • The costs-benefits analysis omits a description of the anticipated benefits.

FMF executive director Leon Louw argues: ”Should this bill be passed, all banking and insurance activity will be micro-managed by unaccounted public servants of uncertain attribution.”

Profit warning

Bit by bit, robo advisers are intruding into the domain of SA financial advisers. In the UK, according to a report in FT Adviser, the robo-advisers could take up to a decade before they start making a profit from their clients.

Analysis by a consultancy firm has found that each new robo-advice customer signed up is losing the company an average of £162,50 in the first year and only making £17,50 in each subsequent year. It means that, assuming the robo-adviser’s business model doesn’t change, the client would need to be retained by the company for the better part of a decade.

Other research has indicated that most robos are destined to fail, leaving regulators and ombuds to tidy the mess. It’s estimated that the UK is at least five years behind the US markets where robos are now the third-largest type of advice mechanism for the institutional and venture capital sectors.

If the UK lags the US to such and extent, then innovators in less-scalable SA had better proceed with caution.