OBG talks to Elias Masilela, Former CEO, Public Investment Corporation

Interview: Elias Masilela

To what extent are domestic asset managers ensuring local investments contribute to inclusive growth?

ELIAS MASILELA: To date, asset managers in South Africa have participated directly and indirectly in funding public infrastructure development projects. While the general mandate of asset managers is to achieve high returns on investments, it can be beneficial to target projects that contribute to economic growth and development. With a raft of large-scale public infrastructure initiatives in the pipeline, the private sector is prepared to assist in financing these to turn them into bankable projects. That said, we are also seeing a trend in longer investment outlooks, reflecting a focus on sustainability.

Asset managers indirectly participate in developmental funding through bond holdings in their asset allocations. They do so either by purchasing government-issued paper in the bond space or in the form of managing pension funds. In this regard, we are seeing rising demand for inflation-linked bonds to match assets to liabilities and signal confidence in policies. This yields a crowding-in effect from the private sector.

Directly, we hope to see more asset managers take on long-term and sustainable outlooks to contribute to job creation and economic growth. Infrastructure projects across sectors such as energy, transport and IT are providing opportunities for the private sector to contribute to economic and social development.

The challenges South Africa faces are structural in nature and cannot be resolved by simply throwing money at the problems. It is a function of financial resources, human capital and infrastructure capabilities. Asset managers should incorporate this as a long-term focus when investing in order to respond to such imbalances in the economy in parallel to achieving strong returns.

What challenges do pension funds face when looking to gain exposure in Africa?

MASILELA: Investing in the rest of Africa has become an appealing option for pension funds, given their attractive returns. However, volatility remains high and is reflected in the 5% allowance afforded to local retirement funds to limit such external exposure. While diversification is important, we should not forget that the bulk of liabilities remain in rand, weakening any case to diversify 100% to non-rand assets; hence the stringent limit on how much can be taken offshore.

In terms of risks, it predominantly comes down to information asymmetry. Africa is not a unitary economy, as each state has different regulatory structures and governments. Moreover, investors face risks such as low levels of liquidity, currency risks, volatility, capacity constraints and less-developed corporate governance. The lack of liquidity in some African markets leads to a mismatch, as most pension funds in South Africa are defined by contribution. Therefore, allocations tend to be small in order to manage the related risks.

Nonetheless, opportunities are available for pan-African investments, especially in infrastructure and energy projects. High growth rates, increasing urbanisation and a growing middle class make African economies attractive. To start off, it may be easier to target African markets of larger size and liquidity, in which one can gain exposure through direct allocations, a balanced portfolio or indirect exposure.

How will pension fund reform impact the investment strategies of local operators?

MASILELA: The logic around a harmonisation of fund structures is to increase access to services by reducing complexity and cost. This can be seen in umbrella funds, which benefit from economies of scale. They allow delivery of the same services for a fraction of the cost. If we are going to have pension reform that results in a national security fund, the rules must enable costs to drop. It would ensure that replacement ratios of people who participate in the scheme increase over time. This requires an adequate design and implementation scheme. If passed, fund managers would need to scale up and improve efficiencies and transparency. Together these steps should reduce the unit costs of access.