At the recent Alternative Investments Seminar hosted by the Actuarial Society of South Africa, pension funds made it clear that they have an appetite for ESG and impact investing. And the best way to express that is through alternatives.

‘I think ESG and impact investing are something that we all need to integrate and take seriously,’ said Ndabe Mkhize, CIO of the Eskom Pension and Provident fund. ‘It’s a balanced view between making a positive and measurable social and environmental impact alongside financial returns. Ultimately, beneficiaries need enough money to live on, but also a good enough world to retire into so that they don’t have to spend their money on things like clean air or healthcare.

‘It’s no longer an ideological thing. It’s something that any long-term investor needs to take into account. They have to think about the long-term ramifications of the decisions they make.’

Local need

This is particularly significant in South Africa.

‘We really need growth to accelerate in this country,’ said Mkhize. ‘We need job-creating growth. We don’t just want to see the JSE shooting up while many people remain unemployed. And the likes of real assets, infrastructure, direct property, and to some extent private equity go a long way towards doing that.’

In his view, it shouldn’t require pressure from the state for investors to recognise this.

‘We tend to think that the idea of investing in infrastructure is something that comes from the government and that they should keep their hands off pension funds,’ said Mkhize (pictured). ‘But when you travel the world, you see the Canadians have been doing this for a long time. Australians are investing en masse in real assets. We are actually just playing catch-up.

‘There is no political party that should be telling us to go into infrastructure. It should be investment professionals that see that these assets match their liabilities, and they have a positive impact on the economy.’

As Xolisa Dhlamini, a lecturer at the University of Cape Town (UCT) Graduate School of Business and a trustee of the UCT Retirement fund, noted, pension funds need to understand that this is simply pragmatic.

The right options

‘Pension funds are not there to be meeting the developmental needs of a country,’ he said. ‘But they really do rely on the economy in order to function, find investment opportunities, and generate the returns that their members need.’

There is a growing appreciation of this, and therefore a growing appetite for alternatives. This has only been accelerated by the poor returns from local listed equities.

However, for smaller defined contribution (DC) funds in particular, that demand is not finding a suitable supply.

‘Part of the challenge is thinking about products or investment portfolios that are suitable for a DC fund,’ said Dhlamini (pictured below). ‘It’s a concern we share with many other funds around things like liquidity and daily pricing. When you have some alternatives not pricing on a daily basis, that poses a challenge.

‘So there is a need for innovation around products. Liquidity is important to us. Being able to price daily is important to us. Rather than consultants telling us we need to change that, how about fund managers coming up with products that make it easier for pension funds to allocate capital?

‘You are not seeing innovation from fund managers in terms of coming up with the kinds of structures that are needed for pension funds to go into things like renewable energy or infrastructure investments.’


Mkhize agreed.

‘Globally, there are some players now who have secondary funds that are able to buy out limited partners or investors in private equity or infrastructure funds,’ he said. ‘So the issue of liquidity need not be the reason why people don’t invest. In South Africa, we don’t have an active secondary market, and that is something we need to drive.

‘There are also open-ended infrastructure funds that allow you to get out when you need to get out, and which can value assets on a quarterly basis.

‘These investments cannot just be left to DB [defined benefit] funds,’ Mkhize added. ‘We have a slew of DC funds, so this innovation, which is really not pushing the envelope, but just playing catch-up with the global market, is going to be needed.’