To SRI or not to SRI

Bonds or equities- you now have a choice if you want to make a positive social impact.

The people at Futuregrowth Asset Management are a happy bunch. Their SRI (Socially Responsible Investment) infrastructure and development bond fund, with assets under management of R4.6bn, did well and belies the fact that some trustees are a little weary of SRI funds, and their ability to provide decent returns.

The portfolio manager Kelebogile Moloko says that they are looking to invest around R1bn in unlisted developmental assets this year including the refinancing of a toll road, and financing the growth of the SA taxi securitisation loan book, finalized in May this year.

The SA Taxi business was essentially a management buy-out from parent African Bank and a refinancing opportunity, and proof of the viability of the business is that they have only written off R60k of bad debt thus far.

There is a 40% equity component that the driver has to invest; there is insurance, life and vehicle, tracking systems, and the like. The ripple effect on the community is huge, says Moloko, and SRI is really a theme, and not really an asset class.

Onto the new stuff. A new fund in the stable, the Futuregrowth infrastructure and development equity fund is promising a benchmark of CPI + 10%. They reckon they can do 20% in debt financing, with an expected return of between 18% and 22%.

In terms of their infrastructure investments, they expect a relatively moderate inflation environment, and while there is some risk during the construction phase of any infrastructure development, this is not the case once the asset begins producing returns. Howard reckons that investors will see returns after five to six years.

Turning to some of the perceptions concerning SRI, portfolio manager James Howard says that talking to the trustees has been a long-term goal for the business as they provide insights into SRI.

Howard says that they focus on positive screened investments - or investments that provide positive impacts. While Moloko says that one of the key issues is measuring the impact of SRI, and its no longer purely about infrastructure investments.

Needs will change over time as the country moves into the next level of development, and Moloko says that they have done a deal with Capitec Bank and there is a commercial relationship between Capitec and Futuregrowth. There was funding provided and equity taken. Futuregrowth got involved at R2 per share, and the share price is around the R30 mark.

Turning back to SRI, Howard says that looking for deals outside of infrastructure development is difficult, as they (the deals) are hard to find and relatively small and intense.

Fortunately there is access to equity early on in infrastructure development. For example, the construction companies need to take equity as they then take ownership and the TRAC N4 project is a case in point, which has provided good returns.

Turning to the pension funds, which are the largest investors in SRI, pension funds were looking for access to this asset class, which is traditionally difficult to source as its unlisted and is long-term. Added to which the returns only kick in after several years into the management cycle. Another issue is that of liquidity.

On the question of fees for the new SRI equity fund, Howard says there is a straight management fee of 2.25%, initially, no fees on committed capital, and no incentive fees during the initial period - of three years- from when the first R300m is invested, with a R300m commitment. There is a flat fee of 30bps (3%) per annum, excluding VAT, on any surplus cash in the fund.

Health warning: This article shouldn't be construed to be offering advice. There is a fair amount of "marketing speak" that needs to be worked through and people interested should be talking to specialists in this sector, which includes a thorough needs analysis, and investment risk.

Editor's thoughts:
*SRI is an asset class and as such should be measured in returns. Positive social impacts are also important but as one commentator so eloquently puts it- it's an investment and one shouldn't get too emotionally involved.