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September 15, 1997 01:00 AM

S. AFRICA FUNDS GO THE LIMIT

Joel Chernoff
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    JOHANNESBURG, South Africa - South African pension funds are pushing their 10% overseas investment cap to the limit as the nation re-enters the global investment community.

    Leading South African pension funds are making plans to boost international equity allocations close to the maximum imposed by the South African Reserve Bank.

    And, experts anticipate Reserve Bank officials will further loosen foreign investment rules within six to eight months, opening the door to further international expansion.

    Among the major changes:

    The 30 billion rand ($6.4 billion) Transnet Pension Fund - South Africa's second-largest pension fund - has selected five managers to manage 3 billion rand in international equities, said Esmarie Strydom, investment manager.

    In its first foray into overseas investments, the Johannesburg-based fund has selected Bank of Ireland Asset Management (U.S.) Ltd., Greenwich, Conn.; Brandes Investment Partners L.P., San Diego; Lazard Freres Asset Management, New York; Orbis Group, London; and SEI Investments, Oaks, Pa. Allocations have not yet been determined.

    The 13 billion rand ($2.77 billion) Eskom Pension and Provident fund, Bryanston, will hire up to five international equity managers to run nearly 10% of assets by year-end, said Linda Fleming, financial engineer. The fund has an undisclosed investment in foreign bonds that would be switched into international stocks, as well as using previously banked foreign reserve credits. The fund also is seeking a global custodian, which likely will be named by late November.

    The Metal Industries Benefit Funds Administrators, Johannesburg, are exploring investing 10% of their 25 billion rand ($5.3 billion) in assets in overseas stocks. The pension and provident funds might allocate a total of $100 million in global mandates in the first quarter of next year.

    The MPF Management Service (Pty.) Ltd. fund for mine workers plans to boost overseas equity exposure to 10% from 5% within a year. The 29 billion rand ($6.2 billion) Johannesburg-based fund is expected to go to 15% eventually, said Graham Dickason, general manager, international assets.

    Some funds held back

    While some South African pension funds - notably the Pretoria-based Iscor Pension Fund - jumped into foreign investment early, others had held back as they faced a steep learning curve in dealing with international markets.

    In addition, resistance of South Africa's militant trade unions to investing pension assets abroad sometimes was a factor.

    But pension officials say they have educated trustees on the virtues of investing abroad.

    "I think the unions themselves are slowly realizing that in order to protect members' benefits, they have to have that kind of exposure," said Ken Morgan, managing director of the metal industries' fund.

    Investing overseas still is not straightforward for South African institutions. Under Reserve Bank rules, an equal amount of money must be invested within South Africa as goes abroad. This means South African institutions have to find counterparties to engage in asset swaps, and it's not always easy.

    South African pension experts uniformly expect the Reserve Bank to abandon exchange controls, and asset swaps with them. The question is when, and in what increments.

    Humphrey Borkum, chairman of Smith Borkum Hare (Pty) Ltd., Johannesburg, a wholly owned subsidiary of Merrill Lynch & Co., New York, said he "wouldn't be surprised to see (the foreign investment limit raised) to 30% to 35% within the next six to eight months."

    Richard Spilg, executive director of RMB Asset Management (Pty.) Ltd., Sandton, thinks a move to 15% is more likely.

    J. Roy McAlpine, chairman and managing director of Liberty Asset Management Ltd., Johannesburg, said "the whole swap mechanism has been a total and utter disaster," Foreign investors have acquired South African securities at a discount, and then hedged back into dollars, he said. The hedge eliminates the intended effect to protect meager South African foreign reserves.

    Swaps issue affects Transnet

    The swaps situation could affect the Transnet pension fund.

    Unlike the Eskom fund officials, who already have swapped nearly 10% of assets, banking most of the credits with the Reserve Bank, Transnet officials have selected their managers first. They expect to engage in their first swap within the month, Ms. Strydom said.

    "We might not get to 10% within two years," depending on foreign demand for South African securities, she said.

    Officials at the Transnet fund -which covers workers in state-owned companies ranging from the railroad to South African Airways to harbor workers - decided to take a slow but steady approach toward international investment.

    They commissioned an asset/liability study from SEI 18 months ago, and included all trustees in the process from the beginning. "We've had very little opposition from the labor side on globalization," Ms. Strydom said. The 20-member Transnet board is evenly split between management and labor trustees. (All South African pension boards will have to have equal representations between management and labor by Dec. 15, 1998.)

    Montreal-based Brockhouse & Cooper, which has a Cape Town affiliate, helped in selection of the international managers. Contracts have not yet been signed, and allocations haven't been set.

    Assets will come from the fund's 18 billion rand domestic equity exposure.

    Assets initially will be invested in unitized pools; transfers to segregated accounts could occur later. Fund officials will seek a global custodial at that time.

    Domestic equity next?

    Meanwhile, fund officials are looking at restructuring the fund's domestic equity investments.

    As of March 31, the fund was 58% invested in equities, 10% in bonds and cash, 7% in real estate and 25% in a special government bond that was contributed to boost funding levels and cannot be sold prior to maturity. That bond exposure enables the fund to take a more aggressive posture with its overseas equities, Ms. Strydom said.

    While bonds are managed internally, the fund had nine domestic equity managers. Transnet officials now are considering indexing a large chunk of the fund's domestic equity allocation - perhaps around 40% - to track the average domestic manager allocation. An unvarnished tracking of the JSE All-Share Index would give the fund an uncomfortably high exposure to mining stocks, which comprise nearly 30% of the index and have been suffering.

    Fund officials also are considering investing additional equity assets in structured tilted index or capital guarantee products.

    If the restructuring is adopted by the trustees, the number of Transnet's active equity managers will be reviewed and likely reduced.

    Consultant Alexander Forbes, Sandown, will advise on the restructuring.

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