The Public Investment Corporation (PIC) is not afraid to throw its weight around and rattle cages.
A strong champion of shareholders can be a good thing, but when does size become dangerous? The PIC is the largest fund manager in South Africa. It controls about R791-billion, almost double its closest rival, Old Mutual, which manages R396-billion of South African assets.
The PIC’s investments make up 9% of the JSE, meaning that any investment decision it takes has an enormous impact on equity markets.
It has serious stakes in some of South Africa’s leading companies, with more than 20% shareholding in both Imperial and Aveng. It also has 17% of Telkom, Sasol and Barlo-world. Most of the PIC’s assets (R727-billion) come from the Government Employees’ Pension Fund (GEPF).
But the PIC has had a poor track record of disclosure, although it recently introduced measures to improve corporate governance.
And its performance as an asset manager has hardly been stellar. Its annual report says it returned 18,7% on its assets for the year ending March 2007.
According to Alexander Forbes’s Large Manager watch, the average performance of fund managers over the same period was 27,96%, with the lowest performance at 20,11%.
A year ago, two independent investment advisers on the board of trustees of the GEPF were relieved of their duties. This was during the time the GEPF was putting together its investment mandate for the PIC. Although no reason was given, it was understood that the advisers wanted GEPF to have more autonomy over its funds and to outsource to other fund managers directly rather than placing all the funds with the PIC.
There were rumours the advisers were asking uncomfortable questions about corporate governance.
The PIC effectively runs a multi-manager model where it outsources 28% of the assets to external fund managers. Colin Bullen, of employee benefits company Lekana, says this is an unusual model for such a large pension fund. To diversify risk, a board of trustees normally outsources to various fund managers.
Diversification was further reduced in December last year when the PIC decided to move R146-billion of funds from external fund managers back under its own investment control.
Bullen says it is unusual for any pension fund not to diversify into offshore markets. Although the PIC has invested $250-million of GEPF funds into the Pan Africa Infrastructure Development Fund, all GEPF assets are invested in South Africa, which goes against sensible risk diversification strategies.
In fact, government employees carry high personal investment risk. They work for government, their pension fund is de facto run by government, and government is the lender of last resort. With extremely poor diversification across both fund managers and offshore asset classes, the risks are only heightened.
Questions also need to be raised about whether the PIC is making a profit from what it pays the fund managers and the fees it charges the GEPF. Could the GEPF be saving money by going directly to the fund managers?
This raises the issue of profits and what role the PIC plays in the asset management industry. This year it made R18,9-million in profit. As it is fully owned by the government, questions need to be asked about where that profit goes.
Unlike other major pension funds, whose assets are managed by in-house asset managers — such as CaLPERS, the world’s largest pension fund or, locally, Eskom and Transnet — the PIC has been corporatised. Concerns have been raised that it may be looking to become a stand-alone fund manager and compete for other third-party assets.
Last year the PIC launched Advent Asset Management, which focuses on property. In its report to Parliament it spoke of increasing its activities.
Considering its already powerful position and enormous economies of scale created by its monopolistic position as the sole fund manager for the GEFP, it would be difficult for private pension fund managers to compete.
Concerns have been raised about its conflict of interest as a multi-manager for the GEPF. External fund managers find themselves having to provide intimate details of their fund management decisions and share porfolios to the PIC, but could find themselves competitors in the open market.
The PIC’s shareholder activism has taken flak too, with commentators saying that the issue of transformation has not been applied equally across all companies, and that this form of activism comes at the cost of other measures that might help shareholders unlock real value from complicated shareholder structures, such as the Liberty and Standard Bank arrangement.
The move by the GEPF to put its assets in its own name may be the first step towards bringing more accountability to its members.
Performance and influence
While all other fund managers list their top shareholdings as a percentage of the assets under management, the Public Investment Corporation’s (PIC) latest annual report lists its top 40 shares according to its stake in the listed company.
The result is that the immediate focus is on the fact that it controls 21,8% of Imperial shares or 17% of Sasol, for example, which is exactly what the PIC wants to be made known.
However, this tells its major client, the Government Employees’ Pension Fund (GEPF), very little about its investment strategy or which areas it might be under- or overweight relative to its benchmark.
For example, Anglo American, which by virtue of its size is in the top holdings of any pension fund benchmarking the All Share Index, is not mentioned in the annual report. Yet the PIC does mention that it has a 10,3% stake in Iliad which, at market price, is worth R323-million, or 0,05% of total assets under management. Is this really worth mentioning in its annual report?
There have been concerns that the PIC and its chair, Brian Molefe, are more interested in the corporation’s influence over company boards than in fund performance.
Its approach to disclosure of investments suggests that this perception is justified, and perhaps sheds some light on the decision by the GEFP, which makes up 92% of the PIC’s assets, to move its investments into its own name.
This means that from now on, when it comes to voting on actions by listed companies, it will be the GEFP, and possibly its chairperson Martin Kuscus, who will be seen as the activist shareholders. — Maya Fisher-French
Going it alone
One has to question whether the Government Employees’ Pension Fund’s (GEPF) board of trustees, which was formed only two years ago, is in a position to exert any influence over the Public Investment Corporation (PIC) at all.
This month’s apparent spat — which saw the GEPF moving its assets into its own name — should not be overestimated.
The GEPF is a defined benefits fund with the benefits guaranteed by government. With that kind of backer, performance may not be first priority. According to a question posted by a member to the GEPF raising concerns about performance, the reply from the fund was that while “the fund has performed better than some and worse than others, the investment performance of the fund does not, however, affect your benefits. Poor performance means that the employer has to contribute more and good performance means the employer has to contribute less. It is, therefore, the employer who should be concerned about the investment performance of the fund.”
A similar response was given to a member raising concerns about costs. Independent actuary Rob Rusconi says questions of cost and performance should not be dismissed because they are of concern to members. The fund is made up of the members’ money, not the government’s money, and although risk is minimal, it still exists.
And let’s not forget that risk could be borne by taxpayers. Rusconi says such a response from any pension fund would raise questions about the integrity of the trustees. “There should be a concern if a fund is spending money without due consideration. Trustees have a responsibility to run it properly.”
According to the GEPF’s 2006 annual report, trustees were paid R2,3-million and R2-million was spent on their expenses. Despite this remuneration, they outsource all investment decisions to the PIC.
Colin Bullen of employee benefits company Lekana says it is unusual for non-professional trustees to be paid. There are independent trustees on the board, but members need to ask if they are being paid, of their qualifications and experience, and whether they attend meetings regularly. — Maya Fisher-French