The Government Employees Pension Fund (GEPF), Africa’s largest pension fund, is set to play a key role in South Africa’s multibillion rand infrastructure investment plans.
In his State of the Nation address earlier this year, President Jacob Zuma invited all South Africans to join government in a massive infrastructure development drive that will enable the economy to grow more rapidly, reducing poverty and joblessness.
On behalf of the GEPF Board of Trustees, we welcome this invitation as it will encourage large-scale capital investment by other institutional investors.
As GEPF, we believe that infrastructure is a sustainable long-term investment that offers low risk in comparison with equity markets. Accordingly, the Fund has set aside about 5 percent of its total R1 trillion in assets for its developmental investment framework, which targets infrastructure projects and other developmental initiatives.
Our developmental investment framework supports the government’s New Growth Path, which seeks to broaden economic activity and create jobs with a clear industrial strategy. Also, our framework aims to target economic growth areas that will result in improved infrastructure and job creation.
As SA grows, so does the GEPF
The GEPF’s developmental approach targets four investment areas: economic infrastructure (such as roads and bridges); social infrastructure (such as hospitals and housing); green economy projects; and small enterprise development and black economic empowerment initiatives.
The Fund’s asset allocation investment strategy supports investment in road and air transport, logistics and telecommunications, and water provision. Domestic bond holdings are capped at 36 percent of the total portfolio.
South Africa’s infrastructure backlog by 2010/11 was estimated at R1.5 trillion. The GEPF saw this as an opportunity to grow its portfolio.
As the largest investor in South Africa with interests across the spectrum of the economy, it is in our interest to partner with government, investors and other interested partners in getting South Africa into a higher economic growth trajectory. We aim to ensure that SA’s economy grows to grow our members’ assets.
Sustainable investment in the wake of the global crisis
The global financial crisis that began in 2008 was the catalyst for GEPF to review its investment strategy. Pension funds, especially those in developed markets, were highly exposed to the collapse in global equities markets and a simultaneous drop in long-term yields. This led to lower pension asset values and rising actuarial liabilities for many funds, resulting in substantial funding and solvency problems.
These issues, coupled with lower expected real returns from equities and other traditional growth assets, necessitated a review of investment strategies. The GEPF began to seek opportunities for improved portfolio diversification and higher long-term returns. But not only returns – the Fund sought to structure its portfolio to play a greater and more direct role in investing in South Africa’s long-term economic development and social upliftment without compromising the Board’s fiduciary responsibilities.
The result – following a year of consultations with the National Treasury, the Public Investment Corporation (GEPF’s main investment manager), public-sector trade unions, the investment industry and academia – was the developmental investment framework.
Many stakeholders argued that, as the largest fund in the country with 1.2 million contributing members, 360 000 pensioners and beneficiaries, and net assets of about R1 trillion, GEPF should set an example to other institutional investors by leveraging its investments to the benefit of South Africa. As a Board, we share this opinion.
The Fund’s initiative is in accord with international trends. Recent research by the Organisation for Economic Cooperation and Development shows that many pension and sovereign funds globally are increasing investment in infrastructure, because this asset class provides both diversification benefits and excellent long-term returns.
A significant national player
GEPF is a significant player in the economy. It owns, on average, 10 percent of most companies listed on the Johannesburg Securities Exchange (JSE) and about half of the government inflation-linked bond portfolio. On this basis, it is only logical that the Fund should play an active role in furthering the national agenda.
Rather than relying on direct foreign inflows, experience from Asian countries has shown that high rates of domestic savings, linked to local investment, lead to sustained long-term growth, which is in the direct interest of all long-term savers, including GEPF members.
The GEPF’s Board is of the view that large-scale and long-term infrastructure investment opportunities are well-suited to the needs of the Fund – a large investor with long-term liabilities.
Infrastructure investments can generate impressive returns that are not dependent on volatile market movements. These investments, made through the Public Investment Corporation and its Isibaya Fund, have not typically been correlated with listed assets, and provide an excellent way to diversity the GEPF’s portfolio.
Moreover, setting aside 5 percent of the portfolio means that GEPF members will contribute to South Africa’s energy supply, to communities’ access to clean water and to improving the national road network.