South Africa is trapped in a low-growth loop, which would ordinarily make it challenging for institutional investors such as retirement funds to generate enough returns to grow their assets and adequately meet the needs of their clients when they go on pension. The saving grace thus far has been larger constituents on the local bourse tending to have more offshore exposure. Nonetheless, this untenable situation of low economic growth must be urgently addressed.
With an estimated R6-trillion in assets, excluding the Government Employees Pension Fund, institutional investors have the clout to turn the economy around and play a meaningful countercyclical role, under some guidance and leadership from the government.
Recent regulatory changes allow retirement funds to allocate as much as 45% of assets towards infrastructure projects. Investors can still assign up to 15% towards private equity, which could partly be used, among others things, to acquire equity in manufacturing businesses and rejuvenate them. There are also impact funds, which look for opportunities to deploy capital in a way that transforms societies and environments for the better, while making financial returns.
Investing in the manufacturing industry has ripple-effect benefits through the rest of the economy. A Pan-African Investment and Research Services study found that manufacturing has a 1.3-times positive multiplier effect on the economy. A 10% increase in investment into the industry would provide an overall investment boost in the medium term of 8.3% across the economy and bolster its contribution to GDP by 13%, the firm said in a report compiled for Proudly SA. It would also add 9% to fiscal revenue and create 75,300 jobs in this sector, 11,500 in mining and 10,100 in agriculture.
Local retirement funds must take the lead as capital allocators of choice, especially given the limited pool of manufacturing companies to choose from publicly listed companies and the recent poor performance of listed equities
Additionally, according to the country's economic blueprint, the National Development Plan (NDP), manufacturing has historically been a critical driver of higher-value job creation and increased living standards.
As expected, manufacturing has shed many jobs because of Covid-19. In 2019, before the pandemic, an average 1.8-million individuals were employed in the sector, but this dwindled to an average of only 1.4-million in 2021. It now accounts for less than 12% of employment compared with 17% in 2006.
Still, it is South Africa’s fourth-largest industry, contributing about R520bn to GDP, or 13%. In 1993, it accounted for a quarter of GDP and was the largest sector, though as countries develop, it is typical for some deindustrialisation to set in.
This country, unfortunately, hasn’t been able to keep up technologically or competitively, and hasn’t had any policy support, resulting in low export levels compared with peers, according to the aforementioned study.
Even so, at Novare, we believe the sector presents unique investment opportunities, underpinned by new technological advancements and the beneficiation of the country’s minerals. A chance to start from the ground up, leveraging the country’s strengths, while taking care of its significant need to ensure we meet our requirements should there again be global supply chain issues, such as during the pandemic.
Local retirement funds must take the lead as capital allocators of choice, especially given the limited pool of manufacturing companies to choose from publicly listed companies and the recent poor performance of listed equities.
Investment is a necessity for sustainable growth and development.
Gross fixed capital formation, which measures the accumulation of goods such as equipment, tools, inventories and vehicles, is typically a good gauge of economic activity. In the manufacturing sector, it fell 11% between 2019 and 2021. Five years before the onset of the pandemic, it averaged annual growth of 1.6%.
This is not a public policy conundrum only; it’s also an investor’s challenge.
Already we have fallen extremely short of the NDP's targets since its release in 2011. One objective was to expand manufacturing jobs by close to 1-million over 20 years. The lack of progress has increased the unemployment rate to 33.9%.
With the government’s purse emptied and its pledge to rely more on the private sector for help with financing infrastructure projects, there is also an opportunity for retirement funds to look for other means to bolster returns.
Historically, domestic pension funds invested most of their assets in traditional asset classes such as listed equities and bonds, with tiny allocations to alternative asset classes.
Most pension funds have long-term liabilities and therefore need assets that match those long-term horizons. Private equity is a perfect match. Even so, relative to other peer countries, its penetration in South Africa has been relatively low.
Only 2% of South African assets under management are estimated to go towards alternative investments, including private equity, venture capital, hedge funds and infrastructure. In contrast, globally, it is estimated pension funds invest between 10% and 15% of their assets in alternative investments.
There is still room for local pension funds to catch up with their global peers, particularly given that a slew of de-listings from South Africa’s primary stock market has resulted in limited opportunities in listed equities.
It is also generally accepted that an ideal vehicle for investors to drive significant social impact, such as direct job creation, is through vehicles with a deliberate mandate to achieve those objectives.
From an investor diversification viewpoint, it is ideal for pension funds to diversify their sources of returns through alternative asset classes that are typically not correlated to traditional asset classes such as stocks, bonds, cash and/or property.
Investing with a predetermined outcome of employment creation — without compromising financial returns — as one of the measures to address South Africa’s poor socioeconomic conditions is a possibility that a favourable policy environment has enabled.
It is now unavoidable.
• Mongalo is managing director: Novare Impact Investment Partners
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