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GTC cautions SA investors against making irrational decisions based on prescribed assets speculation

12 September 2019 GTC

Over the past few weeks, sensationalist media reporting around the issue of prescribed assets, has shaken the already-concerned South African investor. The onslaught of commercially and politically expedient news stories, detailing the potential consequences of prescribed assets, is causing some local investors to make fear-based decisions instead of sticking to rational, fact-based portfolio strategies.

This is according to Clive Eggers, head of Investment Analytics, at leading wealth and financial advisory firm, GTC.

Prescribed assets are investments that an investor is legally forced to make due to government regulation within a retirement investment product. A hypothetical example of a prescribed asset would be the compulsory allocation of (say) 10% of an investment portfolio to Government and state-owned enterprises (S.O.E.), including bonds.

“Prescribed assets are not a new concept to South Africans. In the 1970s and ’80s, the Nationalist government legislated prescribed assets within pension funds, before finally abolishing them in 1989,” explains Eggers. “However, in recent months, prescribed assets have been the subject of much fiery debate, after the ANC tabled an investigation into the introduction of prescribed assets as part of its 2019 election manifesto.”

The ANC’s manifesto stated that it will ‘investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework.’

President Cyril Ramaphosa, in response to a direct question on the matter, recently asserted that a discussion is needed with the Pension Fund industry to explore investments for development and infrastructure purposes. The national dialogue became even more heated recently, with Enoch Godongwana, head of the ANC’s economic transformation subcommittee, reportedly stating that the asset management industry is sitting on R6 trillion under management - and should lend some of this to the state. His argument was that this is a better approach than looking to the IMF or World Bank for a bailout.

“These statements have provided ample fuel for the media to fan fears of misusing or stealing of investors’ savings,” says Eggers. “This in turn has led to many - on social media and other platforms - advising people to disinvest from retirement vehicles to avoid this ‘inevitability’.”

But Eggers cautions that statements and articles in the media are never a sound basis for investment decision-making.

“Investment decisions should be taken based on sound reasoning and verifiable knowledge, often made with guidance and advice from your financial advisor, and not based on fear or other emotions,” he advises.

Eggers says that as it stands today, prescribed assets are only a hypothesis. He adds that no clear plan has been put forward with regards to a discussion on them, let alone how and when they would be implemented. If prescribed assets were to be implemented, there is no indication as to what form they would take or how they would be actioned. As a result, it is impossible to quantify the impact on investor portfolios.

“While GTC is not in favour of any government dictating which assets an investor has to invest in, it is possible that prescribed assets may not result in a detraction of investor returns,” adds Eggers. “There are examples of efficiently-managed private and public partnered investments, which yield attractive returns, that would meet the South African Government’s criteria of enabling social and economic development. That said, we cannot rule out the risk of a sub-optimal investment return.”

It’s also important to note that historical research indicates that the last time South Africa had a regime of prescribed assets, the resultant investment returns were lower than those from other investments. This leaves asset managers and investors facing an uncertain future - although as most investors appreciate, such uncertainty has always been the case. “The spectre of prescribed assets is but one variable in a sea of unknowns,” says Eggers. “We recognise the urgent need to focus South Africa’s resources for economic and social progress, though believe that a light touch from Government - with business and investment markets doing the bulk of the heavy lifting - is the best approach.”

Eggers advises anxious South African investors, who are no doubt tired of negative news, that the best action to take in response to the prescribed assets debate, is to maintain their current investment strategy.

“Indeed, any action taken at this stage would primarily be based on fear, which is an age-old detractor of investment performance,” Eggers concludes.

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