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The alternative to prescribed assets

Alexander Forbes encourages asset allocators to think more seriously about impact investing.

The alternative to prescribed assets

The impact of the Covid-19 pandemic has emphasised South Africa’s desperate need to re-charge its economic growth. The economy was already under pressure before the coronavirus struck, but the need for a new developmental path for the economy is now starker than ever.

‘The economic, social and political sustainability of the country is at risk if we don’t generate economic growth,’ said Isaah Mhlanga, executive chief economist at Alexander Forbes (pictured above).

The private sector has to be a key part of this. In particular, as stewards of substantial amounts of capital, the long-term savings industry needs to think about how best to put these resources to use.

Directing investment

At a macro level, this means identifying the sectors that can have the most impact on the country’s economic development – areas such as agriculture, manufacturing, energy and construction.

As the graph below shows, these sectors make up a smaller part of South Africa’s GDP than the emerging market average.

(Click to enlarge)

‘These are the underling sectors that drive growth in most economies,’ said Mhlanga. ‘But they are under-represented in South Africa relative to other emerging markets.’

This implies that more investment is needed into these areas. However, the challenge for the long-term savings industry is that this cannot be achieved through listed markets alone.

As the graph below shows, these same sectors are under-represented on the JSE relative to their contribution to GDP.

(Click to enlarge)

‘By being benchmark cognisant, we leave a lot of value in the real economy that is not represented in the listed sector,’ said Mhlanga. ‘That is why it is important to look beyond the listed market. The objectives of both financial returns and economic development can be achieved by looking at these sectors in the unlisted space.’


The fact that money invested on the JSE could be put to more productive use is one of the reasons behind calls for prescribed assets. However, South Africa’s history with prescription was severely negative for investors.

While the regime was in place during the 1960s, 70s and 80s, the returns from prescribed assets were not only materially lower than those in the listed equity market, but also fell below inflation most of the time. There was therefore a massive opportunity cost for investors.

‘By prescribing assets, there would be some sort of requirement that investors must invest minimum amounts into specified assets,’ said Janina Slawski head of investments consulting at Alexander Forbes. ‘The advantage is that the government could design this so that those investments went directly to where they are required for developmental impact. But the forcing of that investment is what is problematic. It would be condemning investors to poorer outcomes and not getting the diversification that they need to meet their needs.’

The industry is therefore understandably against this approach. However, it must offer a sustainable alternative.


‘The alternative is to look at impact investing, where you have an investment designed to give a great investment return but at the same time have an underlying developmental impact,’ said Slawski (pictured). ‘These investments would be aligned to what the government is seeking to achieve, but they investors would also be able to confirm that the return they are going to receive is appropriate relative to  the risks. They could look at different options and structures and choose the ones that meet their needs.

‘That’s the big difference. Investors still win, but the investments are made in line with government imperatives.’

The Sustainable Infrastructure Development Symposium is ‘exactly what South Africa needs’ in this regard, according to Slawski. It is looking at over 200 investible opportunities in coming years with a total estimated value of R2.1tn.

It would go a long way to addressing the industry’s feeling that what is hindering further investment in this area is not a lack of will or of capital, but of opportunities. It has also highlighted calls for a review of Regulation 28 to allow a greater allocation to alternatives and for infrastructure to be classified as an asset class on its own.

Managing liquidity

However, as Slawski noted, exposure to these kinds of real assets in portfolios will have to be carefully managed.

‘There is huge enthusiasm and a lot of hope that these current initiatives will succeed, but the one thing we need to be conscious of is that South Africa is very much a defined contribution environment,’ she said. ‘That requires access to liquid investments in retirement funds.

‘Because of the concerns that you need liquidity in a defined contribution fund, most funds will not necessarily be able to invest up to the limits, even as they are now. So, some funds will welcome an increase in limits and be able to put in more, but we are not going to suddenly have R2.1tn coming from funds just because you’ve increased the limits.’

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