PFR2 curtails the once-unbridled access to the tech titans
Financial Products may take time before being ushered
5 years transition may not be enough
Risk-reward waltz may be titled
It is said diversification is the only free lunch in finance and investing. Perhaps this is what informed the previous 38/62 split of pension fund assets invested onshore and offshore. As Keith Jefferis recently said during a breakfast seminar, there was nothing stopping pension funds from holding 50% locally. Ultimately, he argued, “it’s all about serving pension funds”. His point being that the whole point pension funds had more assets outside was for diversification purposes.
The best-performing companies in the world are currently the technology companies. The high-flying stars of the financial galaxy are the disruptors – the tech titans like Microsoft, Amazon, and Google. But, the new Pension Fund Rules (PFR2) have thrown a curveball, mandating a 50% limit onshore. As the wind of change blowing, curtailing the once-unbridled access to the tech titans and pensioners may no longer freely indulge in the tech extravaganza as they once did.
Thato Norman, the Chief Investment Officer at Debswana Pension Fund, the country’s second-largest pension fund supported: this effectively means that pensioners cannot buy them to the extent that they would have previously.
“These companies are disruptors. They operate globally, they compete across the world. So when you lower this universe, you are lowering your return profile,” Norman opined during a bond market panel discussion on pension regulation.
Offshore markets boost pension funds
The offshore winds, often considered the bastion of diversification have been a boon. DPF’s Net Total Assets increased by 4.52% from P10.2 billion in Q1, 2023 to P10.527 billion in Q2 helped by amongst them Global Equities.
Global Equities, the second-best performer, rose 7.99%. DPF observed that Global Investor optimism remained high as markets continued with the positive momentum from the previous consecutive quarters. “Global Equities led the surge spurred by strong corporate earnings, moderating inflation, improved labour markets, increased investor confidence, and a positive economic outlook,” DPF says.
The S&P 500 index generated 8.7% in the second quarter of the year underpinned by resilient corporate earnings, soaring technology stocks, moderating inflation, and a positive economic outlook. DPF says technology counters were the major driver of growth in the quarter, fuelled by rising interest and optimism in Artificial Intelligence (AI).
The ballad extends beyond borders. Botswana Public Officers Pension Funds’ (BPOPF) annual report showed that Asset Under Management (AUM) grew from P88.6 billion in 2022 to P94.3 billion in 2023, as offshore performance improved.
“Global equity and bond markets performed well over the year 2022 and into the quarter ended March 2023, boosted in part by China’s quick reopening following the end of strict COVID-19 lockdowns,” the report says.
Readiness
A key question pondered is how the industry will maintain the benefits of diversification (globally) and avoid concentration risk. While pension funds have benefitted from offshore markets, one fund manager said if the industry were to make a determination of onshoring funds by looking at how they work as investment managers, moving repatriating assets is not a problem itself.
In terms of readiness, Botswana Insurance Fund Management (Bifm) CEO Clair Mathe-Lisenda believes the industry is ready. In any case, based on the recent statistics circulated by the Bank of Botswana (BoB), pension funds are not far off from intended onshore allocation. The intention is to be at around 38% this year which is where the market is. By December 2024, the industry will be at 41%, 44% by December 2025, 47% by December 2026 and 50% to be achieved not later than December 2027.
Opportunity costs
An interesting aspect of readiness is in terms of making sure that the industry minimises the opportunity costs that results from the repatriation of assets. Will the industry sway the risk-return waltz as it repatriates assets?
“That’s what is arguable, as to whether the industry is actually ready to get to the 50% without really disturbing the risk-return profile of the underlying investors and pension funds,” Mathe-Lisenda said.
The key thing for Mathe-Lisenda is not to just make sure that they bring some cash, but in the process, at least, from their perspective to make sure that “we also are mindful of our fiduciary responsibilities as service providers”.
“We need to make sure that we don’t forego any returns unnecessarily in the process,” she cautions, fearing the industry might not be as ready as the spotlight demands.
“We always decry and complain about market illiquidity, particularly when it comes to local equities. That is not likely to change as a result of regulatory changes.”
Abundant cash
The financial landscape, lush with cash, has limited absorptive capacity and calls for innovation. Jefferis sees it as a challenge – a puzzle unsolved. Botswana Public Officers Pension Fund (BPOPF) revealed during the conference its strategic asset allocation in fixed income is currently underutilised, with approximately P1.2 billion remaining uninvested. Moemedi Malindah, the CEO of BPOPF specified that the uninvested amount is held in cash.
“We talk about the money that is coming to Botswana as the key thing. But we have been struggling with many other things before them.”
Jefferis cautions that cash, often the last resort asset class, has its limits. Excess liquidity, once an afterthought, threatens to make an encore if most of the funds will be lying idle.
With the rules reshaping the playbook, the focus shifts to non-traditional asset classes. In the crescendo of challenges, opportunities sing in harmony. Yet, as the financial ensemble gears up for the grand performance, time becomes the silent conductor.
The reality on the ground is it takes time for these to actually be structured. Even with pension fund trustees, Mathe-Lisenda explained that if you structure a new fund, it is not uncommon for it to take a year to be approved.
“Once we have approval, we can’t straight away take it to pension funds. We have to make sure we cross our T and dot the I’s.”
“It is not uncommon to take two years to have a product that you can usher into the industry. We have been given five years, it may seem to be a very long time but practically it is not when you look at the end-to-end processes.”
The finance stage is set, the players ready, and the instruments tuned. As the financial opera unfolds, the question remains: will the industry hit the right notes, or will it be a discordant finale?
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