Coen Welsh | Nov 14, 2017 | 0
GIPF investment mandates require a rigorous review
I just read your jaw-dropping article titled “GIPF sweetener, very sweet”. You would have to question whether the investment was really done with the need of the beneficiary in mind. The charges of the asset managers reflect the greed that is at the moment the common perception of investment bankers. The third point in question would be the investment process of the GIPF board of trustees.
It is very frustrating to see such mismanagement of funds that are meant to benefit current and future pensioners, who are very vulnerable in a high (5% – 10%) inflationary environment. lt is always sad to see how quickly their savings dwindle if the pension they receive doesn’t keep pace with inflation. I talk out of experience because I work as a portfolio manager for one of the big four banks in South Africa, where I invest billions for my more than 350 clients (mostly their pensions) according to their risk profile. Like the beneficiaries of the GIPF, my clients are dependent on growth in their investments to give them a return that beats inflation plus some “real” growth.
But even more frustrating is to see how the investment/asset managers consume most of the money as management fees. This is borderline unjust enrichment at the expense of the beneficiaries of the trust. Investment managers need good access to information, research and specialists which doesn’t come cheap, but this doesn’t justify a fee of more than 1%, never mind the 6.6%they actually charge. To incentivise good performance I would suggest a performance fee on a rolling basis with a high water mark once they have outperformed the benchmark. This should also be set realistically to reflect the risk of the investment (and to compare apples with apples). A good benchmark for listed investments would be the JSE All Share Index (which returned 16% per annum over the last 3 years). Since unlisted investments, in particular private equity, is a lot higher risk the benchmark should be a couple of point above the ISE All Share. It seems that the investment had a negative return, so any management fees above 1% is daylight robbery.
This leads me to the last point: the investment process of the GIPF board of trustees. Although one can’t expect all the trustees to be astute investment professionals, it is their job to be responsible and act in the interest of the beneficiary. If they do not have experience in the world of investments, it is their job to hire independent consultants who would need to help them on which investment mandates should be given out, to whom, what the benchmark is and what proportion of the overall assets should be invested in the asset class (asset allocation). They should also advise on the fees.
One might question how a poorly managed GIPF would affect us, and why a proper handling of the fund is in the interest of the public? The reason is simple; if this sort of money wasting continues then the fund is underfunded in the future. They would either need to raise more funds from the government to keep to their pension obligations, which means that scarce Tax funds will have to be diverted. Alternatively the pension pay-outs would decrease (or not increase with inflation) and thus create a bigger proportion of poor residents who become more dependent on the state’s hand-outs, thus a bigger proportion of the fiscal budget will have to be spent on social welfare. I hope government does the right thing and does a rigorous review of their GIPF and takes action against the passengers of the gravy train.