Bigger even than Old Mutual, the governmentcontrolled Public Investment Corporation (PIC) now owns more than one in every 10 shares on the JSE.
It has R460-billion in assets under management and is the country’s largest single investor.
Yet its investment policies, largely in the “hot” areas of bonds and blue chip equities, appear conservative, to say the least.
It has almost no exposure to investments in previously disadvantaged areas such as townships. And its investments by one of its key funds, the Isibaya Fund, in empowerment, infrastructure, technology, small and new business are largely still, by its own account, in the planning stage.
In short, the PIC is helping fuel the growth of the developed economy while the government has made narrowing the gap between the first and second economies the top economic priority.
Corporatised in April this year, the PIC looks after the funds of the Government Employees Pension Fund, which account for 90% of the funds it manages.
The pension fund has 1,3-million members, who contribute through a monthly deduction of 7,5% of their salary. This brought in R18-billion last year.
It paid out R15-billion in the same year, as pensions and other benefits such as disability payments.
Membership revenues cover outflows, but the fund also earned R19-billion in interest income and R4,2-billion in dividend payments. Net cash inflows were R25-billion.
The pension fund’s assets topped R344-billion last year, worth R2,5-million each if expressed as an average value to each member.
The PIC has shown remarkable growth, with assets under management more than doubling from R221-billion in 2000 to R461-billion in March 2005.By June its assets topped R488-billion.
Its annual report says that its investments on the JSE make up about 10% of the value of shares listed on the JSE. “We are the largest investment manager in South Africa and the African continent.”
Of the R461-billion now under its management, 47% — R218-billion — is invested in fixed-income securities (bonds) and 38% — R175-billion — in JSE equities.
The PIC did not respond to e-mail and telephonic requests for a list of its holdings and to questions on its investment priorities, but it is now the largest individual shareholder in many leading South African companies.
Net income earned for the year ended March 2005 was R80-billion, including R4,5-billion in dividends, R23,8-billion in interest payments, R12,5-billion in realised share price gains and R38,4-billion in unrealised share price gains.
The PIC appears to be aggressively growing its stake in some companies. Its share in Sasol has jumped from 13,3% to 21,7% and in Old Mutual from 7,32% to 10,3%.
Investors, particularly foreigners, who invest in the bond and equity markets are sometimes characterised as “hot” investors, meaning that they can relatively quickly exit their investments.
The PIC has 85% of its investments in bonds and equities, the latter being confined to the blue chips.
Just less than 10% of its assets are in cash as money-market investments. Less than 1% — 0,79% — is invested in property.
Black economic empowerment (BEE) and small- and new-business as well as infrastructure development is funded from the Isibaya Fund, making up 3,57%, or R11-billion, of the total portfolio.
The Isibaya Fund was established in 1999 after an amendment to the Public Investment Commissioners Act to allow for 3,5% of pension fund assets to be used in socially responsible investment.
This is somewhat less than the 5% of institutional funds which President Thabo Mbeki has suggested should be invested in socially responsible investments.
Isibaya had a baptism of fire in empowerment funding, when the special purpose vehicles used to finance BEE deals collapsed as stock markets corrected in the late 1990s. It saw its R500-million book value fall to just R200-million by June 2003.
It funded the warehousing by the PIC of the Thintana stake in Telkom, this later sold in part to BEE investors in the Elephant consortium, netting a profit of R1,5-billion for the PIC.
Isibaya has also been involved in the funding of the Newshelf purchase of an 18,7% stake in MTN and the purchase of a 25% empowerment stake in Investec. In April this year the PIC bought back 12% of Newshelf stake in a deal designed to reduce debt.
Isibaya has also invested R150-million in township shopping centres through Futuregrowth’s property fund.
The PIC’s annual report states that Isibaya has implemented a new strategy. Presumably more investments — in empowerment, medium-sized entities, industry, infrastructure and ICT (information communications technology) — will follow.
One school of thought holds that the government should not build up dedicated pension funds, but should rather run these on a pay-as-you-go basis, meaning that should shortfalls arise between contributions and outflows, the taxpayer makes up the difference. This argument wants the government to be as small as possible and to concentrate on doing the things the government is supposed to do, such as building and maintaining infrastructure and providing the services that the private sector can’t or won’t — health and education, for example.
It is not the role of the government to build up huge funds that own 10% of the JSE, the argument goes.
Based on this, the government could have used the R26-billion in net pension-fund income to build more infrastructure, for example, rather than increase its stake in Sasol, Old Mutual and other leading blue-chip companies.
But the government has admitted it cannot spend the funds at its disposal, the Budget deficit falling to an embarrassing 1% of gross domestic product from a budgeted 3%. This represents R30-billion in capital spending that has been foregone, because regional and local governments have insufficient skills to manage capital-spending projects in their regions.
The modern or first economy continues to race further away from the second even though Mbeki has identified the chasm between the two as the country’s primary challenge.
Speaking at the PIC launch in Sandton in April this year, Mbeki said that just nine civil service pension funds on the continent collectively hold in excess of $120-billion. The PIC makes up $70-billion of this.
“If we were to agree among ourselves to set up an African infrastructure fund, a possibility exists for us to start taking our fate, as Africans, into our own hands.
“This would give us the possibility to use our own resources — perhaps with leverage from the African and international private sector — to deal at least in part with our developmental challenges,” Mbeki said.
But the PIC shows this is still a dream. It finds it easy to invest in blue chip JSE companies, but has had mixed success with empowerment and far less success with infrastructure, technology and small enterprise development.