Diversification critical for pension funds, as NSSA considers agric value chains
by Tawanda Musarurwa
Global economic activity this year has revolved around Covid-19, but for local firms, the pandemic only served to further compound an already challenging operating environment.
For pension funds in particular, the return on investment ratio has declined.
However, entities such as the State-run National Social Security Authority (NSSA) appear to be beating the odds on the basis of diversified investments.
The statutory body uses a liability-driven investment strategy that is based on cash flows needed to fund future liabilities, and is commonly observed in the defined benefit (DB) space.
This allows NSSA’s investments to be truly multi-asset.
The Authority recorded a 700 percent jump in investment performance between January and October 2020, notwithstanding inflationary pressures and Covid-19, as its diverse investments yielded positive returns.
“NSSA achieved a seven-fold growth or 711 percent growth in investment performance from $2,7 billion in January 2020 to $21,8 billion by October 2020, bettering inflation and exchange rate movements,” said NSSA’s chief investments officer Isaac Isaki last week.
“One of the key philosophies guiding our investment strategy is diversification. Principally, the bulk of our investments should perform well.
“Diversification means that NSSA’s pensioners are not prejudiced if some investments do not perform to expectations. Actually for some investments that have not performed well, we have been able to recover the initial capital through foreclosures.”
NSSA’s diversified portfolio is currently valued at US$449,6 million, structured as follows: equities (53 percent), property (41 percent), foreign holdings (5 percent), fixed income (1 percent) and cash (1 percent).
The foreign holding — a US$20 million stake in regional financier Afreximbank — has been particularly impressive, yielding US$2 million in dividend payments between 2017 and 2018, and US$1,2 million in 2019.
The social security scheme has sought to replicate the success of its 2017 investment in Afreximbank by recently acquiring a US$1,7 million stake in a regional reinsurance company.
And it is looking to further broaden its portfolio by extending into agriculture, renewable energy and other commercial projects.
“Our current investment thrust is to invest into opportunities, companies and projects that provide maximum economic and social impact within market return context.
“This is in support of Vision 2030, and key areas of focus include agriculture value chains such as maize, wheat, soya and export crops such as macadamia, blue berries and the like.
“We will seek to participate in unique commercial projects that have capacity to generate foreign currency, shaping and resuscitating pivotal industrial activity, as well as renewable energy,” said Mr Isaki.
Even though occupational pension funds typically have different structures, they could still benefit from targeting alternative investments.
But Zimbabwe Association of Pension Funds (ZAPF) director-general Mrs Sandra Musevenzo says some local pension funds have been slow and not innovative.
“Not a lot of pension funds have been adaptive to alternate investments. They have been overcautious and too slow to react, remaining largely in the same shape they were in over a decade ago when the first hyperinflation period hit the market.
“However, pension funds have different pension scheme designs , which, therefore, influence their management and investments choices, and yes, to some extent they are flexible and responsive to alternative investments,” she said.
“You will find that aggressive pension funds have alternative investments in schools, medical facilities, shopping malls, warehouses just, to mention a few. It is also not the pension funds’ fault but that of the asset managers as they have not played their part in creating or identifying such assets.”
But while acknowledging the extensive potential benefits of alternative investments for pension funds, the Organisation for Economic Co-operation and Development (OECD) and the International Organisations of Pensions Supervisors (IOPS) have jointly warned of potential pitfalls and the need for enhanced regulation.
“Alternative investments can provide the opportunity to better manage or lower overall portfolio risk by proper diversification of (low correlation) assets, and allow pension funds, as long-term investors, to benefit from the illiquidity premium that may be associated with less liquid instruments.
“They can provide more efficient investment mechanisms for gaining exposure to certain assets and to thereby allow for the possibility to improve the risk-adjusted return of their investment portfolio,” said OECD and IOPS in a 2011 paper.
“However, pension fund regulatory and supervisory authorities recognise that riskier strategies are often inherent in alternative investments, given that some were initially designed for high net-worth individuals (with a consequent high risk tolerance).
“Such investments may be complex, illiquid or opaque, and therefore require careful scrutiny and analysis, and in many cases, more rigorous review and monitoring than most traditional products (particularly in times of volatility when correlations and other assessments may change).”
