JOHANNESBURG – South African pension funds should consider allocating more funds to alternative asset classes like infrastructure and private equity, an analyst argues.
Paul Boynton, head of Old Mutual Alternative Investments, says although these investments are illiquid, it offers a potential return premium of around 3% to 4% and can have a positive economic impact.
Globally there seems to be more interest in these asset classes.
Boynton says a report by professional services firm Towers Watson on the 16 largest pension fund markets globally suggests that on average across the universe just under 25% of assets are committed to so-called alternative assets. This includes assets other than stocks, bonds and cash. (The percentage also includes real estate).
He says the sense is that around 5% to 7% of developed market pension funds are allocated to private equity and between 2% and 3% to infrastructure.
“Infrastructure is the fastest-growing alternative asset class globally so one would imagine that would increase over time.”
Pension funds in Australia, which are at the forefront of the trend, on average have 7% allocated to infrastructure.
Boynton says South African institutions are, on average, lacking significant commitment to alternative assets and private equity investments.
The Public Investment Corporation (PIC) through the Government Employees Pension Fund (GEPF) and some other parastatal pension funds have made allocations to these asset classes, but substantively on the whole, a lot of pension funds have no exposure to these assets.
Boynton says the sense is that illiquidity is the biggest concern for pension funds in this regard, as you can’t change your mind quickly.
He says once a pension fund has committed to a private equity fund or an infrastructure fund it is locked in for the horizon of the fund, which could be anything from ten to 15 years.
“It is a serious commitment that you make.”
Risk will also be a consideration but each fund has a different risk profile, which can vary widely depending on the specific project involved.
“Is the South African institutional market assessing this asset class opportunity correctly? In our experience we’ve definitely had a positive impact on our funds from having been involved.”
Boynton says globally the precedent is the same – that there is a return premium available for being invested in these illiquid asset classes.
One international fund that has had considerable success with the strategy to incorporate alternative assets in the portfolio is the Yale Endowment Fund. The current chief investment officer, David Swenson, took over in 1985 and the fund has since grown from $1 billion to over $25 billion in size.
Looking at the African situation as a whole, the World Bank estimates that Africa needs $95 billion a year in infrastructure investments over the next ten years.
Boynton says governments and bilateral and multilateral aid will probably contribute more than half the amount leaving a deficit of roughly $40 billion. One potential funder could be the long-term savings industry.