PIC pays a dividend

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This interview was originally aired on RSG Geldsake (in English, with an Afrikaans introduction that has been translated here).

RYK VAN NIEKERK: The Public Investment Corporation or the PIC released its annual report for its 2023 financial year today. Now, the PIC is the largest fund manager in South Africa and has R2.6 trillion of assets under management, 90% of which belongs to the Government Employees Pension Fund, the GEPF. It also manages funds on behalf of the Unemployment Insurance Fund and the Compensation Commission Fund.

The PIC is a state-owned enterprise [SOE] and it received a fifth consecutive unqualified audit opinion from the Auditor-General, and it paid a dividend of R141 million to government.

Abel Sithole is the CEO of the PIC. He is on the line. Abel, thank you so much for your time. A state-owned enterprise paying a dividend – that’s not something we’ve seen recently. When last did the PIC pay a dividend?

ABEL SITHOLE: Well, actually we have just paid physically R99 million of an outstanding dividend that we had held back until there was approval from the shareholder for the dividend to be paid. And the R141 million has not been paid yet and must still be approved for payment at the next AGM.

But of course in the interim, although we didn’t pay the dividend, we have been kind of operating very well, making profits. Unfortunately, there was an issue around the dividend policy which had to be approved by the shareholder for us to pay the dividend.

But the good news is that the PIC has been performing well and has been able to pay the outstanding dividend, and has now declared a new one for the shareholder to approve.

RYK VAN NIEKERK: I wish more SOEs would pay dividends. It would make a big difference to our fiscal position.

But let’s talk about the funds under management. That is always the big, big number for asset managers. That increased by 2% to R2.6 trillion. Now, R2.6 trillion is a lot of money, but that doesn’t seem to be a significant increase. How does it compare to previous years?

ABEL SITHOLE: Maybe to close the issue about the dividend, I think the dividend is quite important, but the growth of the assets under management is probably even more important because that really speaks to how we are managing the assets that have been entrusted to us. The benefit of that in a sense outweighs any dividend that we actually pay to government. So it’s okay to pay a dividend, but to actually perform and deliver returns to our clients is more important.

RYK VAN NIEKERK: Absolutely.

ABEL SITHOLE: The issue around the 2% increase – you need to look at that in relation to the benchmark that the clients have given us in the first instance. So how have we performed relative to the benchmark? Have we met the target that the clients have set? The answer is yes, and we’ve exceeded that.

But more broadly, how have we performed relative to the economy in totality, because most of our investments are in the country and we always speak about our performance being highly correlated to the performance of the South African economy.

The economy has been performing probably [at] less than 1%, actually much less than 1% if you actually look at how the economy has grown. So our 2% growth must be seen in relation to how the economy has performed, and how the total JSE has performed in the same period of time. You will find that we actually have performed better, relatively speaking.

RYK VAN NIEKERK: I’ve looked at your asset allocation within your portfolio, and around a third of the total amount of the R2.6 trillion is invested in government bonds.

Now there are concerns that government may [put] some pressure on the PIC to invest in more government bonds and to assist state-owned enterprises.

Do you have a ceiling for investments in bonds as an asset class, and do you plan maybe to invest further in bonds, especially from Eskom – and maybe in Transnet?

ABEL SITHOLE: You will know that the PIC Amendment Act is very, very specific about the fact that we get our mandate to manage the assets of our clients from them.

So there’s no scope for us to be in a sense told by government what to do, because the law is very specific.

We must actually be managing the assets based on the instruction of our clients to us. That’s in the first instance, and that’s contained in the PIC Amendment Act.

And secondly, of course it does speak about our broader social mandate in terms of being cognisant of the past, being cognisant of the need for transformation and being cognisant of the change in the economic dynamics, looking at industrialisation. That’s contained in the act, so it doesn’t come from government. That’s the first point.

The second point is: what is the extent to which we can invest in government bonds and state-owned enterprises’ bonds? That is contained in the mandates that clients give us.

Clients would actually give us a mandate based on very scientific studies – asset-liability modelling that seeks to ensure that we manage the assets to be able to meet the liabilities that they have, the promises in terms of the benefits that they need to pay to members. That will then give us guidance in terms of strategic asset allocation and we then implement that.

So again, that doesn’t come from government, it comes from clients.

It’s driven by the need to meet the benefit promises that have been made by our clients to members, the GEPF, to pensioners, widows and orphans and the like; UIF, people who are no longer working, and CF [Compensation Fund,  people who have been injured. So that’s really what gives us an indication of how to invest. And to the extent that the strategic allocation says you can go up to whatever percentage, we can go up to that. That’s important.

And then of course as to whether we will continue supporting, I think it’s important to state that other than maybe the fact that the Land Bank has defaulted, government has not defaulted and state-owned enterprises have not defaulted. Yes, you can say, ‘supported by the taxpayer’; that’s correct. But the reality is that they have not defaulted.

But as we speak, you actually get incredibly good returns from bonds. For instance, you could actually be investing in bonds for, say, a 12% return. Inflation is running at something below about 4% or 5%. The difference is about 7%. So actually bonds are at this point in time a good investment.

RYK VAN NIEKERK: But are you happy with the magnitude of the exposure, being around a third of the total portfolio, because it is significant?

ABEL SITHOLE: You’re looking at it as the bonds of government.

But you must remember our clients actually do want bond exposure significantly, because you’re getting a guaranteed return of capital, and a guaranteed return helps our clients to match the liabilities that they need to match.

This is driven by the fact that bonds generally, or fixed income, tend to be a match for certain liabilities that our clients have.

So are we happy with that? The answer is – because it meets the requirement of our clients – yes, we are.

RYK VAN NIEKERK: The JSE is an interesting bourse or stock exchange. Now, the PIC must be the biggest single investor on the JSE, I think, by a mile. But the JSE is bleeding listings, the investment universe is getting smaller and smaller. Is the JSE still offering opportunities for a big asset manager like yourself, because I’ve seen a list of investments by the PIC in the Top 40 shares, and in virtually all of those shares the PIC owns more than 10%. So are you worried about what’s happening on the JSE?

ABEL SITHOLE: No, no. I think the domestic exposure that we have as an asset manager is for us an issue that we are watching very, very closely.

We definitely would like to diversify in the same way that we diversify among different asset classes. We would also like to diversify geographically.

The reality is that diversification is good; you know the old adage – it is the only free lunch you can get. Diversification comes at hardly any cost. So diversifying in terms of asset class, diversifying in terms of geography, is always a good thing. And to the extent that our clients allow us, we would actually want to do that, diversify more outside of the current economy.

But I also need to indicate that yes, we are concerned about the delistings from the JSE.

But some of the delistings for us mean that we can, for instance, still participate even if the entities are delisted. For instance, the delisting of a company like Distell.

We were fortunate in a sense that when Heineken was created, we were allowed to, yes, convert our shares that we held in the listed environment to the unlisted environment. So we also have the ability to benefit more now on the unlisted side.

But definitely I think there is a greater concern around the need to encourage our companies to list, because then it actually allows us a bigger pool of investments to make. It reduces the concentration risk that goes with being heavily exposed, as we are, to our domestic market.

So I do think that yes, we are concerned about the delistings and I know that we are having conversations around how we make the listed environment an attractive investment for companies, because there are companies out there that, when they delist, don’t go out of business; they continue to operate as unlisted.

RYK VAN NIEKERK: Around 9% of the portfolio is invested offshore, 6.5% in global equities. Now many private-sector portfolios or pension funds can invest up to 45% offshore. I’ve read somewhere that the average foreign exposure or offshore exposure of pension funds is around 30%. So [your] 9% is really low. What is your perception regarding offshore investment and the 9%? Is it not perhaps underweight?

ABEL SITHOLE: It definitely is underweight as I indicated earlier on. I think we would like to get more exposure, but maybe the important thing is to explain why the difference.

The difference between our exposure on behalf of our clients – the largest client being the GEPF – is that the GEPF is governed by a law that is very different from the Pension Funds Act, which under Regulation 28 has been allowed by the Minister of Finance to now invest up to 45% offshore, which is why the private-sector pension funds have been pushing their exposure more and more offshore. I think currently it is close to 39%.

We would like to be there, but unfortunately the GEPF-allowed exposure is much less than that. It’s actually sitting at about 11%. And of course we are engaged with the Minister of Finance to allow higher allocations for the GEPF and our clients to be able to invest more offshore, simply because I think it allows you exposure to investments that are definitely not available in South Africa.

It gives you other benefits like currency diversification and such. But at the same time, of course, it is important that domestic investors do support the domestic markets, because if we all now are supporting external managers – unless the external managers are coming into our market – it creates problems for our own market in the long term.

RYK VAN NIEKERK: Regulation 28 was also changed, which allows funds like the PIC to also invest in infrastructure projects and impact investing. Now there are many projects looking for money. Are you investing in some of the infrastructure projects, maybe in the renewable space?

ABEL SITHOLE: You are the first, for me, to say there are bankable projects out there looking for money.

We tend to struggle to find bankable projects where we can invest. So if there are bankable projects, I know that we are prepared to fund those projects.

As you would appreciate, our unlisted portfolios’ main focus is actually about supporting core businesses – not via an intermediary like the JSE. So we are investing directly in businesses.

One of the big areas where we currently are investing is in the clean-energy space. So we are participating in solar and wind companies, or at least supporting companies that are actually playing in that space. We make direct investments where required.

We are a major supporter, for instance, of Sanral [South African National Roads Agency] – as you’ve indicated, of state-owned enterprises. One of those will be Sanral, which actually is heavy on roads and slowly starting to become more active in that kind of infrastructure.

Sometimes what is not said when people talk about our support of state-owned enterprises is the appreciation of the fact that most of those actually do provide economic infrastructure which, when it doesn’t work, creates problems for us and the economy broadly.

So whether you talk about Eskom providing energy, or you talk about Transnet providing logistical capability, that’s all infrastructure that, if it doesn’t work, becomes problematic [not only] for us as investors, but also for the broader economy.

But I think the message is that we definitely are looking to invest in bankable infrastructure projects. So if you know some of those, please let us know and we’ll have a look.

RYK VAN NIEKERK: But there are hundreds of these projects, many of them in the private sector who would like to invest in solar plants, wind farms, etc, to boost electricity generation. When you say ‘bankable products’, what do you mean by that?

ABEL SITHOLE: When you’re investing in a project you must, number one – without it necessarily providing a guarantee – get a very strong sense that it’s going to generate the requested revenues to be able to pay back your money and to give you a return.

Now that’s in simplistic terms what bankable means. So I need to invest in you, I must get my money back and I must get a return on the money that you are giving me.

But [let’s] talk about the ones that you’ve indicated as examples.

For instance, companies in clean energy – we are a major role-player in that we are supporting a lot of companies that are actually investing in clean energy.

So if you had to look at the annual report, you’ll find that we are already a significant player in terms of providing funding for companies that are in the clean energy space. That speaks to solar, to wind and such.

RYK VAN NIEKERK: Abel, thank you so much for your time today. That was Abel Sithole, the CEO of the PIC.