Demystifying Alternatives

The Batseta Council of Retirement Funds of South Africa hosts conferences that address the concerns of retirement fund members and offer consolidated advice to trustees and principal officers. At this year’s July Winter Conference in Durban, speakers addressed the environment of ‘lower returns for longer’ that investment managers and retirement fund trustees are currently faced with. A popular and recurring solution to the common problems faced was to look further at what the rest of the investments universe has to offer; to seek out alternative investment options.

 

Mabatho Seeiso, an independent trustee and spokesperson, facilitated discussions on Alternatives: private equity (buy-outs and venture capital), private debt (loans), infrastructure-funding debt vehicles, hedge funds, unlisted credit and derivatives. She engaged with the audience on why alternatives have the potential to provide above average, risk-adjusted real returns. Moreover, alternatives do not only yield financial returns, but social returns as well. By investing in alternatives you play an active role in uplifting the economy for your members.

 

Debunking the myths

 

As children we were taught by our parents not to trust things we don’t understand and we often carry this philosophy with us well into adulthood. By the time we are approached with new information about a subject, we have often allowed many misinformed myths to feed our hesitation, even though technological advances have made sharing information on such subjects easier and more accessible. Similarly for trustees, many misperceptions may have kept us from allocating towards alternatives, as on average alternatives only receive a 2% allocation from pension funds – noted by Paul Boyton, Head of Alternative Investments at Old Mutual Investment Group, and by the Southern African Venture Capital and Private Equity Association (SAVCA) report. This may have made sense during a time when Regulation 28 only allowed for a 5% allocation to alternatives (meaning that by allocating 2% you were in fact making use of just under half of the available allocation at the time). But since 2011, this regulation has been amended to allow for a three times higher allocation, at 15%! And yet, many South African retirement portfolios remain reluctantly behind the trend (allocating far under half the renewed allocation), clinging onto the wisps and slivers of myths surrounding alternatives.

 

One of the pioneers for the use of alternatives in the international space is Yale University. Yale has an endowment fund which manages money with a long term investment horizon, similar to a pension fund. In 1985 David Swensen became the Chief Investment Officer (CIO) of this endowment fund and the first thing he rightfully asked himself was “With a multi-generational investment horizon, why should I not increase alternatives in my portfolio?”. In 1985 Swensen introduced alternatives into the endowment at about 10% and in 2017, this allocation to alternatives is sitting at a striking 70%, with only 30% in liquid assets. This hypothesis was further supported by Harvard University, who follow a similar policy with their endowment fund. There is also evidence of an increasingly higher allocation to alternatives in emerging markets, especially by Sovereign Wealth Funds, where the average exposure to alternatives is close to 23%.