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Local CIS industry quietly supporting government

Solving the Eskom crisis is a priority.
The local pension fund industry has been reluctant to invest in SOEs over the last few years due to failures of governance. But this is a trend that can be reversed, says Asisa CEO Leon Campher. Picture: Moneyweb

South Africa’s collective investment scheme industry did not panic in January when the ANC said in its election manifesto that it may investigate the introduction of prescribed assets in financial institutions’ funds in order to open resources for investments in social and economic development.

But they certainly pricked up their ears.

Many in the industry remember prescribed assets under the National Party government where pension funds were forced to invest an average of 55% of their assets in state-owned enterprises (SOEs) – including Sasol, Iscor and various homeland development corporations – and government bonds.

Read: ANC still eyeing pension assets

But things were different then. Capital controls were firmly in place, and the financial system provided for two exchange rates for the rand – one for current account transactions and one for capital account transactions for non-residents.

“Today 39% of the JSE is owned by foreigners, who also own about R80 billion worth of government bonds. If government introduced prescribed assets you could bet that about R3 trillion would flow out of the country,” says Leon Campher, CEO of the Association for Savings and Investment SA (Asisa). “Can you imagine what that would do to the currency?”

It would be a short journey from there to a sovereign credit downgrade, adds Ian Kirk, CEO of Sanlam. “So, you can’t say that it [prescribed assets] is not a concern.”

The executives were talking on the sidelines of an Asisa briefing on trends in the local collective investment schemes (CIS) industry. The industry attracted net inflows of R93.5 billion in 2018, ending the year with assets under management of R2.24 trillion.

Talk is that government is eyeing some of this in its bid to bail out Eskom.

Government projects must be bankable

“The industry is not against investing in government projects,” says Anton Pillay, CEO of Coronation. “But the projects must be bankable. In the 1980s most pension funds were run as defined benefit schemes [where pensioners were guaranteed a specific income], today most schemes are defined contribution schemes [where one’s income depends on the amount you pay into the pension as well as the fund’s investment performance]. We have a responsibility to manage that on behalf of our clients.”

Rob Formby, COO of Allan Gray, notes the success in funding over R200 billion of power projects via SA’s Renewable Energy Independent Power Producer Procurement Programme (Reipppp) in a mere three years. “There is a precedent that demonstrates that the private sector is more than willing to fund long term infrastructure projects in partnership with government. But the business model must be viable.”

Behind the scenes

The assembled executives agree that the immediate priority is to assist government in its efforts to restructure Eskom. “We are not engineers, but we have actuaries and other highly skilled individuals who can help to develop a financial solution,” says Kirk. “There is a lot happening behind the scenes.”

While the industry has been reluctant to invest in SOEs over the last few years due to failures of governance, this is a trend that can be reversed assuming that these concerns can be addressed. “These are the issues that we are dealing with,” says Campher. “Private funding of government infrastructure is essential. Over time it will help de-stress government borrowing and strengthen the balance sheet.”

No surprise

That parts of government are eyeing SA’s sizeable pension assets should come as no surprise. The annual CIS industry statistics for 2018, released last week by Asisa, indicate that the local CIS industry remains remarkably resilient, despite tough market conditions.

According to Sunette Mulder, senior policy adviser at Asisa, despite lower net inflows and a negative return of 8.5% by the JSE All Share Index for the 12 months to the end of December 2018, the industry’s assets under management declined only slightly – from R2.25 trillion at the end of 2017 to R2.24 trillion at the end of 2018.

The bulk of these assets are held in SA multi-asset portfolios (49%), followed by SA interest-bearing portfolios (29%), SA equity portfolios (19%) and SA real estate portfolios (3%).

Mulder comments that the local portfolio split highlights just how much more risk-averse South African investors are compared to their international counterparts.

International CIS investors opt predominantly for equity portfolios (45% of all international CIS assets). Second most popular are bond portfolios (SA interest-bearing variable portfolios), which hold 21% of assets, followed by balanced portfolios (SA multi-asset portfolios), which hold 13% and then 12% in money-market portfolios. 

Investor trends

Mulder says an analysis of the 2018 flow statistics shows that investor behaviour last year did not deviate much from 2017, when cautious investors started retreating from low and medium equity portfolios to the perceived safety of interest-bearing portfolios.

As a result, SA interest-bearing short-term portfolios attracted R30.8 billion of net inflows in the 12 months to the end of December 2018.

However, as was the case in 2017, a big contingent of investors still braved the market volatility in return for the potential of higher returns typically offered by equity portfolios over the long term. SA multi-asset high-equity portfolios last year again attracted the second highest net inflows of R19.5 billion and SA equity general portfolios R12.1 billion.

Mulder points out that portfolios with high equity exposure have on average outperformed (net of fees) interest-bearing portfolios over the long term.

Sector performance comparison


One year to  Dec 31, 2018

5 years to Dec 31, 2018

10 years to Dec 31, 2018

20 years to  Dec 31, 2018

SA Equity General





SA Multi Asset High Equity





SA Interest Bearing Short Term





SA Money Market










Source: Profile Media

Where did the inflows come from?

Mulder says 29% of the inflows into the CIS industry in the 12 months to the end of December 2018 came directly from investors – up by 1% from 2017. “This does not mean that these investors acted without advice. A number of direct investors pay for advice and then implement the investment decisions themselves.”

Intermediaries contributed 32% of new inflows, compared to 30% in 2017. Linked investment services providers (Lisps) generated 21% of sales (22% in 2017) and institutional investors like pension and provident funds contributed 18% (20% in 2017).

Offshore focus

Locally registered foreign portfolios held assets under management of R442 billion at the end of December 2018. These foreign portfolios recorded net outflows of R6.4 billion over the 12 months to the end of 2018.

There are currently 459 foreign currency denominated portfolios on sale in South Africa.



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Again, an insightful article from Sasha, as it potentially impacts S’African’s personal wealth (and not only the wealthy, as “prescribed assets” will similarly impact the lowest paid employee as well, that…just on a smaller scale).

On the aspect of “prescribed assets”, how would it be practically implemented?
(say for example on individual’s discretionary investments into Unit Trusts or ETF’s….even TFSA’s (I suppose the ‘structure’ does not matter as TFSA’s may also be subjected to ‘prescribed assets’)…even asset-swap type “global” funds (Rand hedge) under local fund managers, would have the same possible burden.

Only exception (just off the cuff) if you invest directly in SA or foreign shares through local Stock Broker…as there is no fund manager involved making investment-decisions, and direct offshore domiciled funds(?)


As I understand it, not all investments would be affected. It would be the Reg28 funds (pension funds) that would be required to allocate a certain portion of your savings into government-approved instruments — like a bond to finance Eskom, or SAA or new water pipes or new roads etc.

Thanks Sasha. OK, Regulation 28 funds would thus include all Pension, Provident & Retirement Annuity type funds. Discretionary funds out of the net.
At least the % interest returns on govt bonds are seemingly good, as it makes up for loss of capital… 😉

A most interesting article Sasha but I have a wider and maybe more nebulous concern. Sure, financing Eskom etc seemingly produces a good return but in reality these entities may offer attractive rates but just to get the cash to spend, essentially on themselves, not to improve or actually make a profit (see SAA). Similar to the comment about investing in Reipppp schemes. They were not intrinsically financially viable, only the over the top rates offered by Eskom (why?) made them so.

Ultimately it could just be a snowball that will crush citizen (rather taxpayer) SA. I say there should be some responsibility with these “investments”. If it isn’t a solid, well run, transparent concern; no money. Yeah right.

End of comments.





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