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Management of institutional assets – Are we ever going to get to an optimal state?

11 December 2018Azola Mayekiso, Chief Executive of Sanlam Investment Management
Azola Mayekiso, Chief Executive of Sanlam Investment Management

Azola Mayekiso, Chief Executive of Sanlam Investment Management

One would be forgiven for believing that institutional assets, such as life and retirement fund assets, ought to be invested with a long-term mindset in mind.

The bulk of the liabilities are due so far in the future that it stands to reason that the assets should aim to match the long-term nature of the liabilities. Therefore investing in real assets, as well as looking to further develop African stock exchanges by backing private equity companies whose exits can be facilitated by floating on the exchanges, can be a real boon for the South African, and African, economies. The converse, where the long-term institutional assets are invested with a short-termist mindset, will ensure sub-optimal outcomes as we are already experiencing, where funds are unable to meet their long-term investment objectives and at retirement, only a fraction of members are actually able to retire comfortably. What ought to sprint everyone into rapid corrective action is the fact that over the last four years in South Africa, we have been in a low return environment for listed asset classes.

The United Nations Department of Economic and Social Affairs reports that among those Africans above the age of 65, 52% of males and 33% of females were active in the labour force in 2015. In fact, the majority of older persons in sub-Saharan Africa have no choice but to continue to work for as long as they are physically able, due to the absence of adequate savings. When compared to their contemporaries in Latin America and the Caribbean, 38% of older men and 17% of older women were working. In Europe, the measure is even more telling; 10% of older men and 6% of older women remained active in the labour force. So the problem of inadequate retirement savings is more pronounced in Africa, which means African institutional asset owners have even more of an obligation to ensure that there is optimal investment of pensioner assets.

Apart from this problem of inadequate savings at retirement, longevity risk is also going to be a real problem that further exacerbates the inadequate savings problem. According to the UN World Population Prospects: The 2017 Revision, Africa is projected to gain 11 years of life expectancy by 2050; reaching 71 years in 2045-2050. Danish research also shows that by 2045, the number of people aged 60 or older will be higher than the number of children worldwide. This will be the first time in history. All of this, therefore, means that having an optimally constructed investment strategy/plan is no longer a nice-to-have. In order to obtain satisfactory retirement outcomes, investments to cover a longer life will need to consistently outperform headline inflation and must be carefully chosen so as to also have an impact on the growth of the South African, as well as African, economies.

If the issues mapped out above are more pronounced in Africa, South Africa is also affected. The only difference is that there is enough of a developed opportunity set for South African asset owners yet they seem to be obsessed with tradition when it comes to asset classes that are included in their investment strategies. There are infrastructure (economic and social) projects that institutional capital can be directed to, private equity, direct property and investing in African jurisdictions that show promise. The question you should be asking yourself and your fellow trustees and asset consultants is, why does your fund not have exposure to these high-yielding alternative asset classes?

 

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