Advantage / Momentum Super Nation Fund – Socially Responsible Investment

The catch phrase goes along the lines of “Do Good. Do Well”. Socially Responsible Investment (SRI) is a global phenomenon and South Africa more than most places seems to be the right environment for SRI to thrive. We have many and pressing developmental challenges that should turn our investment landscape into a fertile environment for SRI.

With this background, Advantage Asset Managers took over the management of the Super Nation Fund from Momentum in May 2008. As part of the take-on we took a long hard look at the SRI environment and the construction of the portfolio.

South Africa is a complex environment and SRI is a complex subject, with a multitude of views on what falls into and out of the scope of SRI. Let’s first try to grasp what SRI means in the Republic and then see where we currently stand with SRI.

To start the United Nations has something to say on the matter and has formulated a set of guidelines in the form of the “Principles for Responsible Investment”. These principles are essentially focused on the so called ESG factors, or looking at companies through the lens of environmental impact, social impact and corporate governance.

This then could form a base for conceptualizing SRI.

In addition, in South Africa we have our own homegrown challenges and these imperatives are encapsulated in the Financial Sector Charter (published in the Government Gazette of 7 February 2007):

12. Shareholder activism

12.1 The financial sector recognises that shareholder activism is a critical component of continued

confidence and long-term growth of the sector.

12.2 Financial institutions therefore undertake within the parameters of good corporate governance to:

12.2.1 promote increasing levels of influence of direct black owners at board level;

12.2.2 encourage training and awareness programmes for all shareholders regarding the impact of

indirect shareholding;

12.2.3 encourage shareholder awareness through triple bottom line reporting, reporting on performance in terms of the charter and information about the institution and the sector; and

12.2.4 facilitate, where possible, black companies or individuals voting on behalf of indirect owners.

12.3 Fund managers and asset consultants commit, as part of their obligations in the charter, to comply with the provisions of 12.2 and to improve their knowledge and that of union trustees regarding BEE transactions and targeted investment.

12.4 Pension fund trustees are encouraged to play an increasingly active role in promoting the objectives of the charter on their respective boards and in the entities in which they have taken significant investments.

So a working model of SRI in the South African context would encapsulate both ESG criteria as well as the local imperatives of Black Economic Empowerment (BEE) and Employment Equity (EE).

What does the quantum of investments into SRI look like?

It isdifficult to quantify the amount of money that has been invested in SRI; however, one way to attempt to find a reasonable value is to look at retirement surveys. The Alexander Forbes TDI Manager Watch™ Survey has been around for a number of years. Going back through the archives the value of SRI investments in the survey was R8.3bn as at 31 March 2003. This slowly grew to around R13.9bn as at 31 March 2006. During 2006 and leading up to the adoption of the Financial Sector Charter in early 2007, there was a growth spurt and the universe expanded to R19.2bn. After this the rate of growth has slowed to R22.9bn as at the end of June 2008.

The numbers seem large but when taken in the context of the total size of the South African retirement investment landscape these amounts are rather small (as at the end of December 2005, the value of retirement funds were in the region of R1.3 trillion, which would have grown rapidly in the intervening years on the back of a relatively strong equity market).

Why then has the take up of SRI investment not been that good?

Advantage’s view is based on what you could loosely term conventional wisdom. There is a perception that SRI investments are poor performers and there is a lack of investment opportunities; also, the products themselves are expensive and they tend to address a narrow area of what could be considered SRI.

Let us first consider the returns that have been achieved on SRI. If you page through SRI surveys such as the Alexander Forbes TDI Manager Watch™ Survey or the SRI section of the RiscView Survey (issued by RisCura), it is abundantly clear that these portfolios can and do deliver performance in line with “unconstrained” portfolios that do not have to achieve specific SRI objectives. So, practically, we do not believe that a SRI mandate necessarily results in poor performance.

Browsing through the portfolios represented in these surveys, however, it is clear that many of the portfolios only address a narrow component of SRI. So this view is fairly valid.

When considering the portfolio construction and the changing investment landscape, we wanted to re-engineer a product that addressed SRI robustly along multiple dimensions. Another over-riding objective was that the portfolio would be able to hold its head high in the performance stakes and be structured to deliver returns in line with a typical balanced fund. A fund should be able to invest its entire asset base into the SRI portfolio rather than view SRI as a separate component of a fund strategy into which a small allocation of fund assets is made.

Taking a peak at our mandate you can see these objectives addressed quite clearly:

The Advantage Super Nation Fund is a multi-manager balanced fund that addresses the issue of socially responsible investing on five distinctly different levels:

1. Supporting Socially Responsible Investment through exposure to development asset classes

2. Exposure to companies that support SRI objectives as defined by the FTSE/SRI Index

3. Shareholder Activism through proxy voting and active shareholder engagement

4. Allocation to Previously Disadvantaged (black) fund managers, supporting the development of black investment professionals and investment entrepreneurs

5. If required, broader support for the African Renaissance through exposure to the SRI/Africa Development International portfolio (note that this is an optional enhancement)

We have also made a concerted effort to keep the costs of the product down and try to compete on pricing directly with typical balanced funds.