A prescription to change investment focus
Partnering for better financial well-being outcomes
Agenda
The stock market is not the economy
Alexander Forbes view on
prescription
AF Private Markets and
its impact
David MooreHead of Alternative
Investments
Speakers
Isaah MhlangaExecutive Chief Economist
Janina SlawskiHead of Investments
Consulting
Riccardo Fontanella Head of Investments Technical Marketing
Facilitator
Introduction from our CEO
Dawie de VilliersChief Executive Officer
Janina SlawskiHead of Investments
Consulting
David MooreHead of Alternative
Investments
Speakers
Isaah MhlangaExecutive Chief Economist
Scenarios for the economic recovery
Can the private capital return narrative be shifted and expanded?
COVID-19 confirmed cases continue to rise but deaths fall in major countries
4 434
2 446
1 494824
453 395 390 348 326 3000
500100015002000250030003500400045005000Thousands
020406080
100120140160 US Brazil UK Mexico
Italy France Spain IndiaIran Peru
Cumulative deaths (Thousands)
0
500
1000
1500
2000
2500
3000
3500
02/03 17/03 01/04 16/04 01/05 16/05 31/05 15/06 30/06 15/07
US Brazil UK MexicoItaly France Spain IndiaIran Peru
Deaths per day (7-day average)
101 0102 0103 0104 0105 0106 0107 0108 010
02/03 23/03 13/04 04/05 25/05 15/06 06/07 27/07
DM EMDeaths per day (7-day average)
Source: Bloomberg and Alexander Forbes Investments; Note: Confirmed cases do not reflect all positive cases, they depend on testing
Slow exit from lockdown hinders growth
Source: Bloomberg, Oxford COVID-19 Government Response Tracker and Alexander Forbes Investments.Note: Confirmed cases do not reflect all positive cases, they depend on testing.
‘Second wave’ begins while infections persist in emerging markets
The second wave in South Korea resulted in reintroduction of lockdown measures.
SA’s stringent lockdown provided healthcare system time to prepare for the worst, but the resumption in activity has resulted in faster pace of infections.
Usually as countries observe deceleration in infections they resume economic activity.
Outline
Investing for financial returns and economic development
COVID-19 update
Macroeconomic scenarios for South Africa
Six pillar policy bridge to a higher growth
1
2
3
4
COVID-19 impact has long-term economic damage and delaying economic recovery
Source: IMF and Alexander Forbes Investments
Global economy in a crisis like no other
Growth in advanced economies to be the biggest detractor
In the worst case scenario, SA economy to suffer
The local economy is likely to follow U-shaped
1.7
-8
4.8
2.9
-4.9
5.43.7
-3
5.9
-10
-8
-6
-4
-2
0
2
4
6
8
2019 2020 2021
%
Advanved economiesGlobal growthEmerging Market and Developing economies
Global growth projections downwardly revised
COVID-19 impact has long-term economic damage and delaying economic recovery
Source: IMF, SARB, National Treasury and Alexander Forbes Investments
Detraction in SA economy to last longer than expected
In the worst case scenario, the National Treasury forecast SA economy to suffer deepest contraction of -16%.
Global economy in a crisis like no other, increasing uncertainty around meaningful recovery.
Growth in advanced economies to be the biggest detractor in global output this year.
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
2009 2012 2015 2018 2021 2024 2027 2030
Total (Gross Domestic Product - GDP)
SARB scenario [2020 (-10%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]
NT scenario [2020 (-16%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]
2019 level
Rtn
The local economy is likely to follow U-shaped or swoosh Nike-shaped recovery with economic activity remaining permanently below the pre-COVID-19 level.
COVID-19 impact has long-term economic damage and delaying economic recovery
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
2009 2012 2015 2018 2021 2024 2027 2030
Total (Gross Domestic Product - GDP)SARB scenario [2020 (-10%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]NT scenario [2020 (-16%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]2019 level
Rtn
24%
26%
28%
30%
32%
34%
36%
38%
40%
42%
2016 2018 2020 2022 2024 2026 2028 2030
Unemployment Rate (2019 - 2030)
30
32
34
36
38
40
42
44
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Poverty Rate (%, 2019 - 2030)
Baseline Scen Low-Mild Scen High-High Scen
15
17
19
21
23
25
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
RAT
IO (%
)
Poverty Gap (2019 - 2030)
Baseline Scen Low-Mild Scen High-High Scen
Source: IMF, SARB National Treasury, ADRS and Alexander Forbes Investments
Outline
Investing for financial returns and economic development
COVID-19 update
Macroeconomic scenarios for South Africa
Six pillar policy bridge to a higher growth
1
2
3
4
COVID-19 impact has long-term economic damage
Let us work together to emerge from this pandemic with a more humane society, marked by an economy that is more inclusive, more equitable and in which all South Africans prosper. Labour, business and civil society must join with government in a new social compact for national reconstruction.
1 May 2020
““
Six pillar policy bridge
Pillar 1Macroeconomic
policy reform
Pillar 2Microeconomic policy reform
Pillar 3Private sector-participation
Pillar 4Trade and industry reform
Pillar 5Education and skills
Pillar 6Social policy
reform
Pillar 1 | Macroeconomic policy reforms
The 2020 Budget medium-term austerity proposal is set aside
Government’s budget for transfer spending is increased
An additional R50 billion to government final consumption expenditure
Immediate allocation of financial support to businesses
4% increase in the social infrastructure investment budget
Reductions in the interest rate and an increase in low cost borrowing
Short term COVID-19 mitigation measures
Pillar 1Macroeconomic
policy reform
Pillar 1 | Macroeconomic policy reforms
Government’s annual current expenditure is increased by an additional 3%
A commitment from government to restructure spending towards investment from wages
Monetary policy to contribute to achieving a growth target of 6%
Credit guarantee scheme extended beyond COVID-19
Government and public corporations increase their investment in economic infrastructure, social infrastructure and economic services by 10% annually over the next 11 years
Long term (2021-2030)
Pillar 1Macroeconomic
policy reform
Pillar 2 | Microeconomic (structural) reforms
Tourism sector exports expand
Trade, catering and accommodation services
Agriculture sector grows by an additional 1% in 2021 & 0,5% thereafter
Price of the transport, storage and communication sector declines
Labour productivity increases
Transition in the energy sector towards renewable energy
Increases in competitiveness
Pillar 2Microeconomic policy reform
Pillar 3 | Private sector and international support
Foreign direct investment in South Africa gradually increases
Public-Private Growth Initiative (PPGI), the private sector increases investment
Public Investment Corporation (PIC) increases its investment
Pillar 5Education and skills
Outline
Investing for financial returns and economic development
COVID-19 update
Macroeconomic scenarios for South Africa
Six pillar policy bridge to a higher growth
1
2
3
4
Stylised facts about the listed equity sector and economy
*Earliest data available for India (2003), Colombia (2005) and Russia (2009) Source: World Bank and Alexander Forbes Investments
0
1000
2000
3000
4000
5000
6000
7000
8000
Can
ada
Kore
aAu
stra
liaM
alay
sia
Thai
land
Indo
nesi
aPh
ilippi
nes
Indi
aU
SU
KBr
azil
SAR
ussi
aC
hile
Mex
ico
Arge
ntin
aC
olom
bia
2000 2019Number of listed companies
0
50
100
150
200
250
300
350
Can
ada
Mal
aysi
aAu
stra
liaTh
aila
ndKo
rea
Philip
pine
sIn
done
sia
SA US
UK
Indi
a*C
hile
Braz
ilC
olom
bia*
Rus
sia*
Mex
ico
Arge
ntin
a
2000 2019Market capitalisation (% of GDP)
Financial and economic rationale for broadening the investment universe
*Earliest data available for India (2003), Colombia (2005) and Russia (2009) Source: World Bank and Alexander Forbes Investments
Australia Canada
Indonesia
Korea
MalaysiaPhilippines
Thailand
0
2
4
6
8
0 500 1000 1500 2000 2500 3000 3500 4000
Rea
l GD
P (%
)
Number of listed companies
Argentina
BrazilChile
Colombia
India
Mexico
Russia
SA
UK
US
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500
Rea
l GD
P (%
)
Number of listed companies
Financial and economic rationale for broadening the investment universe
*Earliest data available for India (2003), Colombia (2005) and Russia (2009) Source: World Bank and Alexander Forbes Investments
Australia
Canada
Indonesia
Korea Malaysia
PhilippinesThailand
-4.0
-2.0
0.0
2.0
4.0
6.0
40 60 80 100 120
GFC
F (y
/y %
gro
wth
)
Market Cap (% of GDP)
Argentina
BrazilChile
Colombia
India
Mexico
RussiaSAUK
US
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
0 50 100 150 200 250 300 350
GFC
F (y
/y %
gro
wth
)
Market Cap (% of GDP)
Und
erre
pres
ente
d
Und
erre
pres
ente
d
Und
erre
pres
ente
d
Und
erre
pres
ente
d
How does South Africa’s economic structure compare with emerging markets
Source: Stats SA, Bloomberg and Alexander Forbes Investments
22.8%
2.7%
22.9%
14.6%
9.6%
13.6%
7.9%
2.0%3.6%
19.0%
6.2%
16.9%13.8%
8.1%
21.7%
4.7%3.0%
6.7%
Finance, realEstate
& BusinessServices
Agriculture GeneralGovernment
Services
Wholesale,retail and
Motor trade
Transportand Comms
Manufacturing Mining Energy Construction
SA GDP EM
How does long-term investors invest in the South African economy
Source: Stats SA, JSE and Alexander Forbes Investments
Und
erin
vest
ed
Und
erin
vest
ed
Und
erin
vest
ed
Und
erin
vest
ed
22.8%
2.7%
22.9%
14.6%
9.6%13.6%
7.9%
2.0% 3.6%
23.6%
1.6% 2.6%
10.7%
34.9%
7.3%
17.0%
0.5% 2.3%
Finance, realEstate
& BusinessServices
Agriculture GeneralGovernment
Services
Wholesale,retail and
Motor trade
Transportand Comms
Manufacturing Mining Energy Construction
SA GDP JSE SWIX
South Africa’s economic growth has stagnated
Concluding remarks
Unemployment, poverty and inequality has worsened
Long standing structural constraints kept growth low
The COVID-19 pandemic worsened and exposed faulty lines in society
The economic, social and political sustainability of the country is at risk
A transition towards an inclusive economy
Private investors can drive growth by focusing at returns and growth
David MooreHead of Alternative
Investments
Speakers
Isaah MhlangaExecutive Chief Economist
Janina SlawskiHead of Investments Consulting
Alexander Forbes view on prescription
Prescribed assets | What are they?
First introduced Scrapped
Prudential Investment Guidelines (PIGs):
Government and SOE bonds ~53% in the case of retirement
funds
19891956 2019
Investing in the economy for
inclusive growth
Transform and diversify the
financial sector
ANC Manifesto Secure funding from SA retirement funds?
SOEs and municipalities
South Africa’s developmental
imperatives
2020
Prescribed assets | Regulation 28
The introduction of more draconiandirectives, like prescribed minimum
assets, into Regulation 28 would be a significant reversal of these gains.
It could be argued that prescribed
assets already exist in the form of
Regulation 28
Regulation 28 are prescribed with a spirit
of having the best interests of investors
at heart
Prescribed assets | The opportunity costs
Nominal returns Opportunity costs
Equities Prescribed assets Inflation
Equities returns –Prescribed Assets returns
= “Opportunity Cost”
Prescribed Assets returns -inflation
= “Real Opportunity Cost”
1960s 11.3% 4.9% 3.0% -6.4%
1970s 24.5% 7.3% 11.3% -17.2% -4.0%
1980s 20.2% 13.5% 14.5% -6.7% -1%
Source: Gill Raine, Senior Policy Advisor at ASISA, Presentation to ASSA Investment Seminar 13 June 2019
Our history with prescribed assets has not been a good one
Prescribed assets | Winners and losers
Defined Benefit Funds
THEN AND NOW
Opportunity costs
Employers
Lower funding levels
Employers
Defined benefits
Members
Prescribed assets | Winners and losers
* Dependent on period over which contributions are made and age at retirement. Quoted results are based on a 14% contribution rate and a member, joining at age 25 retiring after 40 years of contribution at age 65.
Defined Contribution
Funds
NOW
Impact of 1% p.a. reduction in investment return
* Dependent on period over which contributions are made and age at retirement. Quoted results are based on a 14% contribution rate and a member, joining at age 25 retiring after 40 years of contribution at age 65.
Opportunity costs
Members
Reduce expected pensions
~14%*~ 3.5%*p.a. extra contributions to replace income
Prescribed assets | The trustee dilemma
Requiring retirement funds to channel assets whose potential return and risk profiles make them unattractive
1
Lower returns for defined contribution members would mean lower retirement benefits
2
Lower returns on assets of defined benefit funds would mean lower funding levels3If SOEs and municipalities would be the government’s preferred conduit for social and economic development, this would result in unintended consequences
4
Trustees have a fiduciary duty to ensure members’ interests are always protected
Prescribed assets | Prescription vs impact
Requires that investors invest into specified assets
Prescription
Government’s funding needs
Investors’ risk/return needs? xDifferentiated investment propositions? x
Positive incentives and structures that improve the social and economic well-being
Impact investing
Government’s funding needs
Investors’ risk/return needs?
Differentiated investment propositions?
win-win
Prescribed assets | The alternative
Organised by the Investment and Infrastructure Office (IIO) in the Presidency
*While these were in the pipeline before the current economic crisis, there has been an urgency to fast-track these opportunities where possible to lift South Africa’s economic trajectory.
Sustainable Infrastructure Development Symposium (SIDS) initiative
Impact without prescription
Purposeunderspend on infrastructure and position key projects
RepresentativesASISA, Batseta, private sector institutions, multi-lateral development banks to name a few
Number of projects presented*200+ opportunities
Total estimated valueApproximately R2.1 trillion for investment over the next few decades
Prescribed assets | The win-win game
Value for money and value for the economy has been the missing link in the prescription debate
Why are we so enthusiastic
Growth and job creation
Differentiated and attractive investment
propositions
Dramatic shift in investment into the social
and economic well-being of the country
Prescribed assets | The illiquid investment challenge
Retirement Fund investors are subject to limits imposed in terms of Regulation 28; current discussion relates to whether increases in limits would mobilise additional assets into infrastructure
Why are we so enthusiastic about the development of the SIDS process and other similar initiatives?
It is not the availability of capital that is the issue … it is the availability of opportunities …
The right incentives and investment propositions have the potential to attract swathes of eager capital
Prescribed assets | Our position
Any potential for sub-optimal investment outcomes Committed to
lead and shape engagements
with the relevant authorities
Opposing Safeguarding
Pensioners reliant on
investment returns
Members of retirement
funds
Prescribed assets | Our position
Voluntary impact
investmentCommitted to
lead and shape engagements
with the relevant authorities
Supporting Safeguarding
Pensioners reliant on
investment returns
Members of
retirement funds
SupportingSA’s citizens
and economy
Speakers
Isaah MhlangaExecutive Chief Economist
Janina SlawskiHead of Investments
Consulting David MooreHead of Alternative Investments
Private MarketsAn alternative to prescription
Private markets cover the following strategies:
Private markets | What are they?
Private equity
AgricultureDirect
property
Infrastructure
Private debt
Alternative investments that are not available on a public exchange
Private market assets in the risk/return spectrum
Ret
urn
pote
ntia
l
Main investment objective Capital gainCurrent yield
Private equity
Opportunisticreal estate
Infrastructure
Illus
trativ
e
Private Debt
SeniorPrivate debt
Asset classes thathelp drive performance
Balanced performance/income focus
Asset classes that helpgenerate stable cash flowsand match long-term liabilities
NaturalResources
Target returns are not a guarantee of future performance, and there is no certainty that investment and performance goals will be reached.
5%
8%
7-10%
11-13%
8-12%
Private markets | Why invest in them?
Uncorrelated, less cyclical, lower volatility
Diversification
Two- to twenty-year time horizons
Long term
Targets ESG attributes
Societal benefits
Alternative source of income generation
Enhanced return
Partnership arrangements allows
wider opportunity set in unlisted assets
Access
Returns linked to inflation
Inflation protection
AF Private Markets | SDG aligned to create impact
AF Private Markets | Creates sustainable energy infrastructure
AF Private Markets via its partner providers actively develop a broad range of renewable energy assets across South Africa. A tangible example within our portfolio with explicit alignment to SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action) is that of Cookhouse Windfarm, (“Cookhouse”) which is a 139MW power plant located in the Eastern Cape.
Cookhouse provides enough green, clean electricity to power c. 43,000 households for a year whilst concurrently offsetting 384,000 tones of Carbon Dioxide, (“C02”) emissions typically produced by traditional fossil fuel based power plants. Cookhouse also aligns to SDG 4 (Quality Education) via the Early Childhood Development, (“ECD”) programme it has implemented in the surrounding communities of Adelaide, Cookhouse, Bedford and Somerset East for children between the ages of 0 and 6 years old.
AF Private Markets | Invest in and create sustainable social infrastructure
AF Private Markets via its partners actively invests in primary and secondary schooling infrastructure across KZN, Gauteng and the Eastern Cape amongst others to achieve commercially acceptable returns for pension fund clients whilst simultaneously creating sustainable, social infrastructure
AF Private Markets via its partners provide funding for the completion of retirement village and frail care accommodation for the elderly in urban and peri-urban communities across KZN, Gauteng and the Western Cape.
Mobile COVID-19 Testing
AF Private Markets via its partners/investee companies are manufacturing mobile testing laboratories on a national scale which allow mass-testing of both urban and rural populations.
Personal Protective Equipment
AF Private Markets via its partners/investee companies are active in the supply of Personal Protective Equipment, (“PPE”) to hospital, their staff and individuals through retail outlets.
Treatment & Essential medicine
AF Private Markets via its partners/investee companies are active in (1) convalescent plasma transfer treatment for COVID-19 patients; (2) ramp-up of production of essential medicines to provide immune support; and (3) supply of key hospital infrastructure – ventilators/defibrillators, etc.
AF Private Markets | COVID-19 relief efforts
Portfolio construction | Private markets portfolios
Access to high-rated managers, early bird
discounts, quick decision-making
Managers that have been thoroughly
researched
Liquidity budgeting, portfolio design
Legal and tax issues covered
Smooth drawdown process
Investments built to target allocation and
maintained
Effective diversification of managers, vintages, etc.
Clear reporting, accounting, etc.
Source: Mercer 2019
What does a successful investment in private markets look like?
FAIS compliance statement
Alexander Forbes Investments Limited (registration number 1997/000595/06) is an authorised Financial Services Provider (FSP711), in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act), as amended. Alexander Forbes Investments Limited is a registered insurer (insurer number: 10/10/1/155), and pension fund administrator (administrator number: 24/217).
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The information contained in this presentation in respect of any product is factual and does not constitute financial advice, as contemplated in section 1 of the FAIS Act. No guarantee is provided.
Opinions and views expressed on various issues such as, but not limited to, economic, legal or regulatory overviews during th is presentation should not be construed as advice nor should it be construed as express or implied recommendations, guidance, or proposals that any particular transaction in respect of a product is appropriate for your particular investment objectives, financial situation, or particular needs.
• Therefore, the opinions expressed during this presentation should not be relied on for the purposes of making any financial, investment or other decision and you should consult with your own independent expert adviser, such as an economist, legal or tax adviser or financial services provider, before entering into any transaction.
Certain divisions within Alexander Forbes Investments may have been appointed by the client to furnish advice to the client.• A portion of this presentation may deal with the advice furnished by the relevant division within Alexander Forbes Investments.• The individual giving this presentation is not necessarily part of that division.• Any advice and/or recommendation is not advice and/or recommendation of the presenter, but of the division within Alexander Forbes Investments, authorised to
provide the advice.• Reliance should not be placed on the information in this presentation, but rather on the official report containing the advice.
FAIS compliance statement
The value of a portfolio can go down, as well as up, as a result of changes in the value of the underlying investments, or of currency movement. An investor may not recoup the full amount invested. All policies issued or underwritten by Alexander Forbes Investments are linked policies, under which no guarantees are issued. The policy benefits are determined solely on the value of the assets, or categories of assets, to which the policies are linked. Past performance is not necessarily an indication of future performance. Forecasts and examples are for illustrative purposes only and are not guaranteed to occur. Any projections contained in the information are estimates only and are not guaranteed to occur. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be realised in the future.
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