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GEPF: Recovery from Steinhoff still possible

Abel Sithole explains the thinking behind the impairments reflected in the annual report.

NOMPU SIZIBA: The Government Employees Pension Fund [GEPF] released its annual report today. My colleague, Arnold Segawa, spoke earlier with the principal executive officer of the GEPF, Abel Sithole.

ARNOLD SEGAWA: Many thanks for making time to speak to us, Abel. Let’s start this off with the performance. We’ve seen some relative improvement here. To be more precise, portfolio growth is 8.3%. Just give us a sense of the holistic figure.

ABEL SITHOLE: You are correct. The overall performance of the GEPF before impairment is a total return of 8.5%. If we bring in impairment that then comes to the 8.3% that you’ve just mentioned. So overall, if you look at a GEPF performance relative to the performance of the year before, I think it is actually a commendable return that we’ve been able to achieve with the asset manager the PIC [Public Investment Corporation].

ARNOLD SEGAWA: If we break down some of these figures we are looking at moving close to last year at R1.5 trillion to R1.8 trillion. In between this figure here, the R200 million, who are the top performers? Who really stands out?

ABEL SITHOLE: If you get a copy of our report, on page 8 what we do is show you where the growth has come from. There has been significant growth in our investments – about 10% compared to where they were last year; 6% on our fixed income domestic bonds and such. And of course our international investments grew by 7%. In the report it will show you a growth of 27% in unlisted, but a lot of that of course has to do with new investments that we currently make. So that basically is where the growth has come from.

ARNOLD SEGAWA: Let’s start to talk about some of these. I’m going to start with outside South Africa, because your portfolio is quite wide – from MTN Nigeria to smart telecoms, to investments in Tanzania. I could go on about many of these for quite a while. How much pressure do you feel when it comes to FX [foreign exchange] volatility, given the rand’s position in 2018. We’ve seen it at R11 to the dollar earlier on in the year, even topping R15.77 later on in the second half of the year. How much FX volatility have you had to endure here?

ABEL SITHOLE: Not much. Again, if you go to page 64 of the annual report, what it will show you is the actual diversification of the GEPF. It will show you the assets. What you will see from that is that our exposure to foreign equities and bonds – it’s about 5% bonds, 1%. Although we have exposure to Africa, in rand terms it’s quite a significant number. But as a percentage of the total assets of the GEPF, it’s quite small. Less than 10% of our assets are actually invested outside South Africa. So, by and large, the assets of the GEPF are rand-denominated as opposed to being in foreign currency – to the extent that 90% of our assets are in South Africa, only 10% offshore. It’s only 10% that is exposed to foreign currency movements. I think it’s still quite small and we would like to grow it in time. But right now we do, yes, experience some change and fluctuation in the assets due to the currency, but only a small portion of the assets are actually exposed to currency volatility.

Read: GEPF deflects write offs, portfolio up 8.3%

ARNOLD SEGAWA: Let’s bring it back home. Domestic bills and bonds are up close to 6% at least in your report. This leaves me thinking you must have a very tough job trying to decide whether or not to go for the large cap or the medium cap or the small caps here. How do you make this decision and ultimately who is buoying this 6% that we are seeing on the domestic bills and the bonds?

ABEL SITHOLE: Domestic bonds are much lighter than… They comprise a much bigger percentage of the portfolio. The 6% – that actually is the offshore, not the domestic. The domestic one is quite large. It comprises close to 20% of the total GEPF portfolio. To be precise, it’s 33%. So it’s quite significant.

But let me go back to your question – how do we make a decision in terms of investing, say, between a mid cap, large cap or specific counters? The GEPF, due to its size, R1.8 trillion – and of course that translates to our holdings on different shares in the JSE – is probably the biggest investor in the South African domestic market. Now, what that means is that we are so big that, in the total portfolio, to try and be active in our management, would in all probability lose us money.

So, by and large, the portfolio is managed passively. What that means is that we try to follow the indices, both on the equity side and on the bond side. So for the biggest portion of the GEPF the decision around how to invest is driven more by the market movement itself than by specific decisions.

But of course we do give smaller mandates to asset managers who themselves might then of course decide to be more active. But those decisions will be taken by the active managers themselves, and there are quite a number of those. But the bulk of it, I would say more than 70% of the GEPF, is managed passively, so we don’t really call the different sectors and the different kinds of market exposure which we might have – large-caps market. We simply invest in accordance with the market.

ARNOLD SEGAWA: One thing that’s very striking in your report statement here is that cost-containment strategies are being implemented and the investment continues to be closely monitored. What exactly are you going for here when you go on about the cost containment strategies?

ABEL SITHOLE: I think it probably refers to a number of things. At one level is the administrative costs – how much it costs the GEPF to administer each member of the GEPF’s pension via the service provider the GPAA [Government Pensions Administration Agency], or the fees that we are paying to the PIC as an investment manager. As I’ve already indicated, by and large we are managing the portfolio passively. And I think, given that a significant portion of the portfolio is managed passively, you would expect to pay a very reasonable fee. We still think there is scope for us to derive a slightly better fee from the PIC than we are currently paying. I’m not saying that the one that we are paying now is not by agreement. We agreed with them. They are not charging us more that what we’ve agreed. But I think there might be scope for us to negotiate some of the fee down relative to the size of the portfolio, where it is now, [compared] to where it was when we agreed the fees.

As I’ve indicated, of course, how much does it cost just to administer the benefits of members relative to the size of the membership that we currently have? And of course, compared to what members in pension funds outside the GEPF in the private sector would be charged for the same level of administration, and also, more important, for the same level of service. So, when we talk about cost containment, that’s what we are talking about.

ARNOLD SEGAWA: Could you shed some more light on the PIC, the fee that you pay to manage this?

ABEL SITHOLE: We have different specific mandates that they are managing on our behalf, and there is a whole range of different fees. So I couldn’t really give you one figure and say, well, that’s the figure that they are charging across the board, because different portfolios that they are managing on our behalf have different fee structures. But I think it’s quite minimal. It’s definitely cheaper than we would get, say, paying asset managers outside the PIC. I can say without any fear of contradiction we are actually getting a good deal out of the PIC. The reason why we think there is scope for reducing the fee is not because they are overcharging us, it’s just that the portfolio has grown so much that even at the lower fee that we agreed on initially, there is still scope for us to probably talk about a lesser fee.

ARNOLD SEGAWA: The GEPF made headlines a few weeks ago with the report coming out and making it very clear that there were two write-offs, those investments totalling close to R5.3 billion. Could you shed some more light on this before we go forward?

ABEL SITHOLE: I think the first thing to do is to correct [that] – we did not write off. We impaired. Now, writing off means that we’d be saying there is no scope for recovery. Impairment is simply saying that we need to put a value that reflects the reality at the date of reporting. So we impaired.

Yes, some of the investments that you impair may be written off in the final analysis if they don’t recover, but most impairments basically work on the basis that there might be scope to correct.

So if we talk about which specific one, we are talking about the biggest contributor to our impairments are, number one, Lancaster, a transaction that we funded which actually enabled some participants to take a stake in Steinhoff before the debacle that it faced last year. Now the reduction in the share price of Steinhoff has had implications on the structure that was put in place to enable the black participants to participate in Steinhoff. That, by and large, is covered through an option that the PIC entered into with a major international bank, which means that at this point in time that value is still protected. But we also need to be prudent to recognise that the difference between what is protected in the share price is something that we need to recognise may not be what it is if Steinhoff is not going to recover from where it currently is at.

So we have been prudent not to write off, but to simply reflect what we think is a realistic value. Now, if the share price were to recover, most of this actually would unwind itself and we would reverse the impairment.

The next one is Independent Media. In the same way the reason why we impaired Independent Media is that they were not able to meet one of their obligations, which was to pay interest at the end of August. This was after the reporting period but, because we knew at the time we couldn’t pretend that we didn’t know. Because there are issues around the ability of Independent Media to meet its obligation, we thought it was prudent to reflect a lower asset value that what I think it is.

So the value of both the Lancaster deals has not been changed. Whatever amount was lent out still remains, and we still expect to recover that. The same thing with the loans that were given to Independent Media. We have not changed that. We still expect to make a full recovery. So the reflection of the impairment is purely saying that in this point we know that’s not possible at that time, but there is engagement hopefully to try to make sure that we eventually get the money back.

So it’s important to distinguish between write-off and impairment. If you want a definition of what it means to impair, on page 73 of the annual report we explain how the impairment works, what it means, so that people get a clear understanding of what it means. It is definitely not a write-off.

ARNOLD SEGAWA: I really like where you are going with Steinhoff here, because to many of our listeners out there this is a kind of caveat that when the stock price recovers there is still light at the end of the tunnel. Is this what you are confirming to me, Abel?

ABEL SITHOLE: Well, Steinhoff. A lot of people have a lot of opinions and say a lot of things. But I think it’s important to also appreciate this. The depreciation in the share price is a reality. We can’t deny that. But we also recognise in terms of Steinhoff that at this point in time we do not really know what went wrong. I think that’s why the investigation is going on. We don’t yet know where it went wrong, we don’t know who made it go wrong. I know a lot of people think they know and they can point a finger and ask why these guys are not in jail. But the reality is that at this point in time we don’t know what went wrong, and that’s why there is an investigation. Only after that investigation will we know.

Now the market reaction correctly is to say that we suspect something is not right, and we don’t know what it is, and how big it is. Until such time that all these things appear, this is what we are going to do. It may very well be that things turn out to be worse, and then we have to write it off to zero. But also it may turn out that our fears are exaggerated, so it is somewhere between where the price is now and what it was – not necessarily that it can go back to where it was.

So say, for instance, they overpaid for assets, it doesn’t mean that those prices are not there, it just means that they overpaid for those assets. So the value might not be, just for comparison, if they paid twice what something was worth, it means the price is not zero. It’s half of what it could have been. I think it’s important to understand that – again, I may be too optimistic – the share price may recover as we get to know the truth about what went wrong, and if the extent of what went wrong is not as big as we think it is, then of course the share price will recover and the current asset will actually be much better than where we currently are at. Of course, if it turns out that they are worse off, we are then going to zero. But it’s important to understand that at this point in time we don’t know enough to be able to take the kind of positions that a lot of people are taking.

ARNOLD SEGAWA: Abel, my follow-up there is: how long do you have to wait until you write off?

ABEL SITHOLE: Well, this is probably a relative thing. If you think about the GEPF’s holding of Steinhoff, where it was this time last year before the debacle and where it is right now, the biggest potential loss – and currently it’s more a depreciation because there is the potential of fluctuation if the price recovers, and maybe I’m being optimistic – but the potential loss has already happened. The potential loss is what happened in December last year, the share price dropping. So that is actually what has gone.

The residual, what we are currently holding in terms of the real Steinhoff, compared to what we have lost, is actually not material compared to what we’ve lost. So if things are as bad as people think they are, the loss has already been incurred. So whatever is left behind is not really material.

For me, people may say: why don’t you just sell off? Selling off is probably the worst thing I can do because, if there is any recovery, even if the share price doubles, moving from the current, say, R3 to R6, the benefit for me is quite significant if just that happens. I would rather hope to recover a little bit of what might be a potential loss than simply saying let’s write it off because I think it’s gone to zero, because it’s not there yet. There are still assets in Steinhoff.

ARNOLD SEGAWA: I hear you. Another question here when it comes to impairment is VBS Mutual Bank. Now, this collapsed earlier this year. It was placed under curatorship initially by the regulator. It gets interesting, because here we are looking at close to R375 million that you’ve actually earmarked for this impairment. This leaves me wondering if the regulator is saying that it’s time, maybe, to sell the assets of VBS. Why is this still being seen as an impairment and not as a write-off?

ABEL SITHOLE: If there are no assets completely, it might be a write-off. But I am sure that with the powers that be, if there has been wrongdoing and people have taken money that they shouldn’t have, I presume one of the processes of recovery will be to go after those assets and they’ll be sold. The GPEF will probably not be first in line; I think the depositors will be–

ARNOLD SEGAWA: Shouldn’t this be a write-off?

ABEL SITHOLE: It may well be a write-off. We are currently reflecting VBS at zero, by the way. The impairment puts the value of VBS at zero. So we have already done that, although we haven’t written VBS off, because we think there is still going be a potential for recovery. But our view is that as an investor the chance that we participate in the recovery is almost non-existent. So we haven’t written it off. We simply impaired it to almost a similar kind of value to what it would have been had we written it off. We put the value at zero, although we know that the value of VBS is not zero.

ARNOLD SEGAWA: This is very interesting. Jut before I let you go, just the other day Mr Anoosh Roopial made it very clear that the redundant assets of the embattled bank will be sold, and all the proceeds will go to benefit the creditors of the bank. This is where, again I ask, shouldn’t you just be writing this off?

ABEL SITHOLE: We are also a creditor. The GEPF is a creditor. That is why we are not writing it off, because we are also potential creditors. I don’t know how much we are going to get, but we are also creditors. So we are in line to participate in whatever is recovered. That’s why we are not writing it off.

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Experts in financial dealings are working hard to convince the public that investing is hard brain work with the possibility to be wrong. Steinhof, outside accounting expertise, did manage the unbelievable to blindfold all investing experts, numbering thousands,by a handful of boers from stellenbosch. On top, their doings did have ECB approval without one expert claiming wrong. It resulted in going withe wind funds. Debating a possible return sound good but useless.
The stuff called your money is firmly and legal in pockets planned for.

End of comments.

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