In North America, institutional investors have an average allocation of 29% to alternative asset classes. In Europe, this sits at 24%. South African institutions, however, allocate less than 2% of their portfolios to alternatives.
“In the global context, we are hugely underweight to alternative asset classes as a whole,” says the head of alternative investments at the Old Mutual Investment Group, Paul Boynton. “And I don’t think that’s the right place to be.”
This is as true for large pension funds as it is for individual investors. South Africans in general have not paid as much attention to the likes of private equity, infrastructure, private debt and hedge funds as investors in most developed markets.
There may be two main reasons for this. The first is a question of accessibility. Historically, it has been difficult to get exposure to these kinds of assets. Individual investors have almost been excluded entirely, unless they are extremely wealthy.
Secondly, there has been less reason for South Africans to look at alternatives because traditional asset classes in this country have performed so well.
“Over 100 years South African equities have given a real return of 7% per year in dollar terms,” says Muitheri Wahome, the chief client officer at Alexander Forbes Investments. “That is remarkable, and so perhaps there has been less incentive to look elsewhere. The reason why more people are talking about alternatives now is because we are expecting lower real returns going into the future.”
The investment case
Wahome adds that the interest in private equity in South Africa is building. Last year allocations increased by 5%.
Boynton argues that there are three reasons why alternative assets make an attractive addition to a portfolio.
“The first is performance,” he says. “If you look at private equity as an asset class in South Africa, Riscura does an industry-wide survey on performance and the ten-year numbers at the moment are running at about 4% or 5% ahead of listed equity.”
In the US, which is the deepest private equity market in the world, the numbers are similar. Private equity delivers returns of between 3% and 5% ahead of listed markets.
“The second major reason for investing in alternatives is diversification,” Boynton adds. “You can diversify your portfolio by being exposed to different sources of return, like infrastructure.”
The risk and payoff profiles of these kinds of investments can look very different to those of traditional asset classes. This makes them attractive, particularly for long-term investors.
“Lastly, and possibly most importantly, is the economic and social impact that can be obtained from investing in these spaces,” says Boynton. “Infrastructure is a case in point. The World Bank estimated that if our energy and transport infrastructure were up to scratch in Africa, we could lift GDP across the continent by 2% per annum.”
There is therefore a meaningful impact that can be made by investing in these kinds of assets. This is not simply altruistic either, as that impact filters into the wider economy, and therefore into broader investment returns.
“CalPERS, which is the largest pension fund in America and a big participant in the US economy, believes that investing in things that accrue positive outcomes for the economy as a whole is a smart thing for them to be doing, even though the direct benefit doesn’t necessarily accrue to them,” says Boynton.
Together with a growing appreciation of the value in alternative investments, changing regulation has also created a more enabling environment. In 2011 Regulation 28 of the Pension Funds Act was re-written to increase the allowable allocation in alternative assets in retirement funding vehicles form 2.5% to 15%.
Government has also made it very appealing to invest in Section 12J venture capital funds through offering attractive tax benefits. Investments into these vehicles are now fully tax deductible and that deduction will be permanent if they are held for five years.
Most recently, hedge funds in South Africa were recognised as collective investment schemes. This has made them essentially as accessible as unit trusts.
At the same time, a number of private equity companies are now listed on the JSE. This gives investors access to unlisted companies through a listed vehicle.
“It is a complex environment, but this shouldn’t make you fearful,” says Wahome. “I think it’s important for investors to think of the opportunities, and get the best ideas into their portfolios.”