Asset manager the Public Investment Corporation (PIC) has defended its performance in its financial year to end-March 2023 despite achieving growth of only 2% in total assets under management (AuM) to R2.599 trillion from R2.548 trillion in the prior year.
The PIC has also expressed concern about the spate of delistings on the JSE and the resultant reduction in investment choice and spoke about its investments in state-owned enterprises (SOEs) despite the huge challenges facing these entities.
Among the PIC’s client investment portfolios:
- The Government Employees Pension Fund (GEPF), representing 88.61% of total AuM, grew by 1.1% to R2.3 trillion.
- The Unemployment Insurance Fund (UIF), comprising 5.14% of total AuM, grew by 13% to R135 billion.
- The Compensation Commission Fund, accounting for 2.09% of total AuM, increased by 4.3% to R54.4 billion.
The assets of 15 smaller client funds, which make up the balance of the PIC’s total portfolio, grew by 7% to R61 billion.
The board of the PIC declared a dividend of R141 million for the year under review to the government, the PIC’s sole shareholder.
The Auditor-General (AG) issued an unqualified opinion on the PIC’s financial statements for the fifth consecutive year.
No significant instances of fruitless and wasteful expenditure were incurred, and no material findings or misrepresentations in the financial statements were raised by the AG.
The PIC said on Tuesday that considering weaker economic conditions and higher levels of risk aversion among major investors, its investment performance for 2022/23 delivered “admirable returns to the portfolios of all clients”.
PIC chief investment officer Kabelo Rikhotso said the return of the PIC on AuM must be put in context.
Rikhotso said the PIC used the Swix Adjusted for Property and Gaming benchmark in the past year, which was provided by its client, and delivered a 0.78% return.
He said the JSE SA Listed Property Index was down 3.3% over the period.
“Quite a huge part of your risk assets were flat or down, so you need to see that 2% return in that context,” he said.
Rikhotso said the PIC also compared very well with its asset management peers despite not having the same scope as them to invest outside the domestic market.
Private pension funds are allowed to invest up to 45% of their assets offshore.
“We[‘re] not anywhere close to that, but even with that, when you look at the ranking in which we participate, we fare very well compared to our peers,” he said.
PIC CEO Abel Sithole said the PIC continues to grow AuM, although maybe not at the pace it used to.
However, Sithole highlighted that it had to liquidate quite a significant portion of the UIF portfolio to support the Covid-19 pandemic Temporary Employer/Employee Relief Scheme (Ters), which reduced the asset base by R64 billion at that stage.
In addition, no contributions were made by the UIF at that point in time, and the PIC has not really been receiving contributions from its bigger clients because the benefits being paid now are larger than the contributions being made, he said.
“So the growth that you have seen is actually growth from what is being managed and not necessarily new money coming into the portfolio,” he said.
Delistings a challenge
Rikhotso said JSE delistings present a huge challenge from a listed investment perspective because it means the opportunities an asset manager trading in traditional stocks has keep reducing.
“It’s something that we are engaging with the JSE on to find out what we can do,” he said.
However, Rikhotso said the PIC has an opportunity to invest on the unlisted side, and there have been delistings where it decided not to sell but to retain its shares in the company.
Rikhotso cited the takeover by Heineken Beverages of Distell and Namibia Breweries in 2023, which led to the delisting of Distell from the JSE, as an example.
“Where we see the opportunity to hold the investing company in the unlisted side, we will do so.
“Given the size of the portfolio we manage, we have tried to mitigate against those risks to ensure that we give ourselves options to hold some of the delisting shares in our unlisted portfolio.
“However, you still need to bring IPOs [initial public offerings] to the market, and we are engaging the JSE. They need to do something to relax the regulations,” he said.
“We know they are doing quite a lot to improve the environment, largely for your small and mid-cap entities.”
The PIC’s investments in listed equities grew by 7.9% over 12 months to R937 billion and delivered positive returns to clients.
Huge payoffs and discounts
Responding to a question about the difficult investment environment, Rikhotso said SA Inc is very cheap and in the bond market, at a 12% yield on a 10-year bond with the consumer price index (CPI) at 4.6%, “you are getting hugely compensated for the risk you are taking”.
“You are supposed to get 3% to 4% real, but you get 7%.
“On listed equity companies, especially the SA Inc ones, those are trading at huge discounts to NAVs [net asset values].
“If you look at the property market, you are seeing discounts to NAVs of anywhere between 30% and 50%. In some cases, it’s close to 60%.
“We know the market is very cheap, so from an asset allocation perspective, we like SA bonds, SA equities, but it is also important, given the size of the book that we manage, to diversify globally,” he said.
Rikhotso said the PIC has allocated some assets to emerging markets, especially China and third-party asset managers in East Asia, where it anticipates growth.
He said Africa is another exciting investment area, but it has adopted a partnership approach, as is evident from its investment of about $100 million (about R1.93 billion) into the Africa Finance Corporation (AFC) to get exposure to infrastructure investment on the continent.
Sithole said any movement in the PIC’s investments in SOEs was not through a loss of faith in these enterprises but largely from maturities.
He admitted that SOEs have challenges, and the PIC is highly exposed to them in terms of how much it has invested in them.
He said the focus sometimes is only on the PIC’s investment in SOEs, but there is a much broader focus it is concerned about.
“It does not only revolve around exposure to SOEs but how those SOEs impact the rest of our portfolio of investments, and therefore, the way to approach those entities is first to work towards making sure that they are able to deliver on their mandate,” he said.
Sithole said that with the exception of one “very small default” by the Land Bank, none of the SOEs have defaulted, and they present some attractive investment opportunities.
The PIC’s annual report said it is the largest holder of bonds in Eskom (R85.5 billion), Transnet (R18.6 billion) and Sanral (R13 billion), and without this continued support through bond purchases, the borrowing costs for SOEs, such as Eskom, Transnet and Sanral would almost certainly have been substantially higher.
This, in turn, would have resulted in a further increase in the cost of basic services, such as electricity and transport, in an environment where elevated levels of electricity supply disruptions and deteriorating rail freight performance already constrain domestic output, it said.
Listen as Ryk van Niekerk speaks to PIC CEO Abel Sithole about the asset manager’s performance (or read the transcript here):
You can also listen to this podcast on iono.fm here.
This interview was originally aired on RSG Geldsake and has been translated into English in this transcript.