South African pension funds are starting to plow money into socially oriented funds, now that fears of obtaining weaker returns have been allayed.
Funds with aims as diverse as aiding South African areas and communities bypassed under apartheid to financing black empowerment had struggled in their early years to attract conservative pension fund money.
But socially oriented funds got a boost in September when the Public Investment Commissioners of Pretoria, the government's 150 billion rand ($32 billion) pension fund, announced it was looking for money managers to run a new equity and bond fund aimed at community and empowerment projects.
This tailor-made portfolio, known as the Isibaya Fund, is solely for the use of the PIC, which is expected to contribute between 500 million rands and 3 billion rands to the fund.
Badie Badenhorst, head of the PIC, said Isibaya "will concentrate on funding infrastructure and community fund projects. We have been working on it for about 18 months."
The involvement of the PIC in this area should help to promote social development as an acceptable form of investment for retirement funds as well as expand the types of projects available - both longstanding challenges for social responsibility portfolios.
The Isibaya Fund will be the latest in a trend of socially oriented funds in South Africa.
Other funds include:
Futuregrowth, available to pension funds only, which was set up by The Southern Life Association Ltd., a Cape Town-based life assurer;
Community Growth Fund, two publicly offered unit trusts, managed by Syfrets Management Co. Ltd., Cape Town, and Old Mutual Life Assurance Co. Ltd. Pinelands;
Sanlam Development Fund, a pension portfolio managed by the SA National Life Assurance Co., more commonly known as Sanlam, based in Bellville, a suburb of Cape Town;
Sechaba Fund, a pensions portfolio set up and run by Fedsure Holdings Ltd., a Johannesburg life insurer; and
Standard Bank Infrastructure Fund, a fund for pensions set up and run by the asset management division of Standard Bank Investment Corp. Ltd. of Johannesburg.
Strong performance boosts funds
Despite perceptions that social responsibility investing meant sacrificing returns, the funds' performance hasn't borne this out.
Futuregrowth's equity fund returned a staggering 71.7% return, gross of fees, in the 12 months ended June 30. Meanwhile, Futuregrowth's property fund returned 22.3%; its income fund - the shorter-term bond fund that invests in bonds financing electrification, housing and other infrastructure needs - returned 20%; and its balanced fund, 31.2%.
In comparison, the Johannesburg Stock Exchange All-Share index returned 10.46%, while the Ginsburg Malan & Carsons all-bond index returned 18.56%. Inflation for the 12-month period was about 9.6%.
The Community Growth Fund's equity portfolio also has been markedly successful. In the year ended June 30, the equity fund returned 21.7% and was ranked fourth out of 31 general equity unit trusts.
Futuregrowth, the first socially oriented fund to be launched, has made considerable headway since its inception Jan. 1, 1994. Its clients include the Eskom Pension and Provident Fund, Bryanston; Unilever (SA) (Pty) Ltd., Boksburg; and the Metal Industries Provident Fund and Engineering Industries Pension Fund, Johannesburg.
Marcus Rautenbach, equity portfolio manager of the Eskom Pension Fund, said: "We invested in Futuregrowth at its inception because not only did it promise market-related returns but also it gave us the opportunity to participate in the upliftment of previously disadvantaged communities. We are comfortable to remain invested."
Angela Docherty, internal investment consultant for Unilever PLC, London, who advises the company's South African pension fund, said Futuregrowth has been successful because of its extensive, local research that controls risk and builds local support for investment projects.
For example, grass-roots groups demonstrated support for electricity projects, ensuring local residents would be paying subscribers and that equipment would not be stolen, she said. The 2.8 billion rand fund has just decided to double its allocation to three Futuregrowth funds to 5% of total assets, she said.
Michael Leeman, co-ordinator of Futuregrowth, said the groundswell of support for social development funds is growing rapidly.
"There are several reasons, which include the successful track record of these investments, more favorable attitudes toward black economic empowerment ventures and the growing number of suitable investments available," Mr. Leeman explained.
Since Nelson Mandela's 1994 election as president, power and wealth has been shifting to black-owned or managed companies, prompted both by formation of interracial business consortia and alliances, and the government's affirmative active action criteria in awarding contracts.
The Futuregrowth has invested in such companies: a direct stake in financial services group Capital Alliance Holdings Ltd., Johannesburg, and an indirect holding in industrial holding group JCI Ltd., Johannesburg.
For some time after funds like Futuregrowth were launched, there was a debate about the problems trustees faced in reconciling their fiduciary responsibilities to ensure members enjoyed adequate retirement benefits and the sacrifice in returns expected from investing in socially beneficial projects.
The first pension funds to commit to these socially conscious funds were trying to foster stable communities for company employees and their families, by funding housing development, laying of water pipes and electricity lines.
But the fears of reduced returns largely have been allayed.
"Funds such as Futuregrowth deliver market-related risks and returns," Mr. Leeman said. "Certainly the risk is higher than in a fully diversified portfolio, but any specialized sector has higher risk. We recommend a retirement fund put no more than 5% of its assets in either our equity, property or income portfolios and no more than 10% in our balanced fund."
Mark Anderson, director of Cape Town-based Labor Research Services, an independent organization whose clients include the Community Growth Fund, said in many cases union pension and provident funds were investing between 5% and 10% of their total assets in social development funds.
Nevertheless there still is a debate within the labor movement about making social investments mandatory for retirement funds, perhaps requiring earmarking 5% of assets.
Mr. Anderson said the level of voluntary investment makes mandated requirements unnecessary. What's more, prescribed levels of investment can introduce pricing inefficiencies, he said.
Rael Gordon, managing director of the asset consulting division of Alexander Forbes Consultants & Actuaries (Pty.) Ltd. of Sandton, agreed. He said pension funds want to put money into socially oriented funds, possibly for purposes of reconstruction and redevelopment, infrastructure needs, and black economic empowerment.
Barriers to finding projects
The problem that bedeviled social development funds at the outset was finding suitable projects in which to invest - an extraordinary dilemma in view of South Africa's evident need for jobs and housing.
Mr. Leeman said the number of projects available has expanded sharply in the past three years and will expand further under pressure from dedicated social responsibility funds.
Initial difficulties arose from the long lead times of suitable projects, because in many cases government rules prevented private-sector involvement in certain projects, such as construction of schools and hospitals.
For example, private-sector co-financing supports the Consolidated Municipal Infrastructure Program. The program, launched in June this year, provides capital grants over a 10-year period to municipalities to enable them to provide services like water, roads, solid waste treatment and community lighting.
Another example is the Maputo Corridor project, a 600 million rand project to build a highway from Witbank in the North Eastern Province to Maputo in Mozambique. In its later stages, the project will involve modernizing the railway and the Maputo harbor.