Stagnant local economy concerns state pension fund

Despite South Africa’s slow local economic growth, the Government Employees Pension Fund (GEPF), which invests over 90% of its assets in the country, said it is not in a rush to increase its exposure to international markets.

Africa’s largest pension fund, which manages R1.8 trillion in pension savings of state workers, released its annual report for the financial year to the end of March. The GEPF recorded sharp declines in returns from its domestic equities (JSE-listed shares) and bonds, which account for over 80% of its asset allocation in its investment portfolio.

Returns from domestic equities declined from an annual return of 9.41% as at March 2018 to 0.43% as at March 2019.

Meanwhile, returns on local bonds were 3.5% as at March 2019 compared with 16.1% as at March 2018.

On the other hand, the GEPF’s offshore investments – mainly global equities and bonds – saw returns of 26.28% and 19.39% respectively, which were “enhanced” by the rand’s depreciation against the US dollar. In 2018, global equities and bonds pencilled in returns of 0.31% and -6.45% respectively.

“The GEPF’s allocation to offshore investments is relatively small, at 5% of total assets [of R1.818 trillion], thus the strong performance of offshore investments did not make a large impact on the fund’s overall return,” the annual report reads.

However, the state pension fund’s overall annual return on investments was 2.6%, which slightly exceeded its 2.3% benchmark.

Careful consideration

Asked if the fund would diversify its investments by increasing its exposure in offshore assets, GEPF principal executive officer Abel Sithole said a decision would not be “taken overnight”. This implies that the GEPF would carefully consider the move.

Sithole explained that in size, the state pension fund makes up nearly half of South Africa’s total pension fund industry – but over 90% of its investment portfolio includes domestic assets such as JSE shares, bonds and cash. Offshore investments are estimated at more than 5%.

Meanwhile, the private pension fund industry invests about 40% of its assets in offshore markets.

He explained that a smaller fund could move its investments into offshore markets and the consequences would have a minimal impact on the economy – “but if the GEPF were to move 10% of its allocation in offshore markets, the whole country will feel it”.

The GEPF is a large investor in JSE-listed shares. Any decision by the GEPF to move investments into offshore markets would trigger massive outflows from the local bourse.

Diversification beyond offshore investments

Sithole said the GEPF’s significant exposure to local assets was not “necessarily a bad thing” given that the state pension fund’s historical growth in the investment portfolio has always been driven by its local investments.

However, South Africa’s moribund economy and resultant poor JSE returns impacted the performance of the GEPF’s investment portfolio, which grew by just 0.88% to R1.181 trillion in 2019.

And because of this, Sithole believes that the GEPF “needs to find other sources of income and returns”.

“If the South African economy is not growing and we are exposed to the South African economy, we are going to plateau [in terms of the GEPF’s portfolio growth],” he added.

The GEPF is not only weighing up geographical diversification of its investments, it is also seeking to readjust its investment portfolio to invest more money in other domestic asset classes.

“The returns are driven not so much by the single decisions of which company or bond do you buy,” said Sithole, adding that they are also driven by how the investment portfolio is structured.

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