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27 October 2004 Angelo Coppola

Inequalities are not being addressed...

Despite the urgent need for financial institutions to contribute significantly towards addressing the inequalities in this country, South African retirement funds have been slow to allocate assets to targeted investment funds, according to Dave Bacher, head of alternative investments at Investment Solutions.

This reluctance is highlighted in the "Targeted Development Investment Vehicle" quarterly survey produced by Alexander Forbes Asset Consultants.

If ethical funds - those including or excluding shares on ethical, social or environmental grounds - are excluded, only a handful of funds invest in local projects that facilitate economic development and job creation - referred to as targeted investments.

It is estimated that these funds represent just over R5 billion, a small fraction of the retirement fund industry's total estimated R867 billion in assets.

"Investment merits will make it difficult for trustees to continue ignoring this "asset class"', says Bacher.

"From a performance perspective, almost all targeted investment funds have outperformed their respective benchmarks (inflation plus or the All Bond Index) over different time periods.

This illustrates that investors do not necessarily have to sacrifice returns to meet social commitments.

"There are also enormous diversification benefits, mainly because these assets are less correlated to traditional assets and are potentially less volatile.

The case for targeted investments becomes even more compelling when the social and economical effects such as access to services, job creation and infrastructural development are considered," he says.

So why have retirement funds shied away from targeted investments?

Bacher says the reason for this cautious approach is probably that the retirement fund industry has been unable to come to terms with the unique characteristics of these investments.

"Unlike traditional assets such as cash, bonds and equities, targeted investment funds tend to be unlisted, illiquid, and require a time commitment, which makes an allocation to them more complex," he says.

Bacher believes that even with these complexities, targeted investment funds are likely to become significantly more popular. There is already evidence of the profile of socially responsible investing being raised internationally.

A 2003 report entitled "Socially Responsible Investing Trends in the United States, Social Investment Forum" estimated that community investing (referred to as targeted investments in South Africa) in the US climbed 84% to over $14 billion between 2001 and 2003.

The same report confirmed that the growth in community investing in the US was consistent with a global trend to encourage corporate responsibility through invested assets.

"The most important local development has been the birth of the Financial Sector Charter," he says, "which stresses a need for retirement funds to focus on productive investment for sustainable growth, or investments that build capacity and create employment.

In addition, President Thabo Mbeki's State of the Nation address can be seen as a catalyst for the growth of infrastructure funds. Although clarity, timelines and detail are still to be provided, the President stated that "55 of the funds held by the institutional investors will be invested in the real economy"."

Consequently, investors are already starting to take targeted investments more seriously.

Recently, African Infrastructure Investment Managers, a joint venture between Macquarie Africa and Old Mutual Asset Managers (SA), announced it had raised over R1 320 million in capital commitments.

Although this is just one example of a growing desire for infrastructure funds, Bacher says believes it is likely that other such funds will start to attract much larger pools of assets.

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