Who are some of the movers and shakers on African financial markets? We often get asked this question and have decided to profile the continent’s biggest investors one by one. Today we start with the Government Employees Pension Fund (GEPF), a South African powerhouse.
Capital News Africa: From the Trading Floor – Week 17-2022
The Government Employees Pension Fund (GEPF) cannot be found in the busy financial capital of Johannesburg nor in Cape Town, a city preferred by several of the country’s biggest asset managers. Instead, the GEPF has its offices where, logically, South Africa’s government is also based: Pretoria. Around 50 kilometres separate the GEPF, one of Africa’s most important investors, from the Johannesburg Stock Exchange (JSE) in Sandton, that city’s business district.
Since its creation 26 years ago, the GEPF has accumulated no less than ZAR 2.09 trillion (EUR 124 billion) in assets. The GEPF has 1.2 million employees that make monthly contributions and another 473,000 beneficiaries to whom a pension is paid. Hence, the scheme’s financial liabilities are still relatively minor.
Such flexibility is also the reason why the GEPF can invest more heavily in equities than pension funds in Europe or the US which have greater liabilities. Currently, the fund has around half of total assets, or EUR 62 billion, invested in South African stocks. Those holdings, in turn, account for 4.9% of the market cap (EUR 1.27 trillion) of all stocks traded on the JSE. GEPF is a true powerhouse on the exchange and no doubt its trading behaviour is closely watched.
The GEPF has ceded management of most (85.9%) of its pension assets to the Public Investment Corporation (PIC). Another state-owned entity founded in 1911, the PIC runs a total of ZAR 1,907 trillion (EUR 113 trillion) in assets.
The PIC manages the GEPF’s investments according to a core-satellite strategy. This involves the PIC dividing the target capital into investments that have a low risk-return profile (core) and those with a higher risk-return profile (satellite). The PIC oversees all of GEPF’s core investments. Sometimes, however, the GEPF hires asset managers other than the PIC to run a portion of its satellite investments.
But just as summer and winter are reversed between South Africa and Europe, the GEPF’s core and satellite strategies are reversed. GEPF’s core investments are not in developed countries but in South Africa. Along with the 50% of its assets allocated to South African stocks, the GEPF also has 30% in South African bonds, 5% in South African property and 4% in domestic cash. Of the remaining assets, the GEPF has invested 5% in stocks traded elsewhere in Africa and 5% in stocks traded outside of the continent.
Unfortunately, the scheme did not disclose the return that it achieved with this portfolio in its latest annual report. What is clear is that while the asset class property helped to stabilise European portfolios in past years, it has become a problem for portfolios in South Africa - including that of the GEPF. On that point, GEPF Chairwoman Renosi Mokate writes in the report: “The performance was negatively impacted by the Fund’s unlisted and property portfolios declining.” No further detail was provided.
Mokate also says that during the GEPF’s financial year ended 31 March 2021, the fund grew by 27.5%, or ZAR 451 billion (EUR 27 billion), to the aforementioned ZAR 2.09 trillion. However, Mokate did not mention how much of the ZAR 451 billion was from employee contributions and how much from market gains. In any case, the new capital was more than four times the amount of liabilities for the period (ZAR 111 billion).
During its 2020 financial year, the GEPF’s investment portfolio lost 10% to ZAR 1.64 trillion. Part of the explanation may be the global market crash caused by the outbreak of the Covid-19 virus in the spring of 2020.
But in the report for 2021, Musa Mabesa, the GEPF’s Principal Executive Officer, says that the scheme’s annual returns since the 2012 financial year averaged 8.9%.
That’s rather impressive. By creating the GEPF, the South African government has not only greatly improved the retirement provisioning of civil servants. It has also created a powerhouse that supports Africa’s capital markets. Moreover, the GEPF is bound by its fiduciary duty to handle its pension assets responsibly. This, in turn, helps to promote best practice among investors on markets like the JSE.