Local Pension Funds Billions Face Risk
• Concentration risk increases, as BPOPF terminates more managers
• Over P22 billion at BPOPF faces increased concentration risk
• DPF’s P2.8 billion also faces increased risk
• UB Staff Pension Fund’s P500million faces risk
• Over 85% of local pension funds under one consultant- Riscura
Investigations by The Botswana Gazette have established a rising concentration risk on billions of Pula in pensioners’ money invested locally through a handful of asset managers and under the dominant investment consultancy of one South African company, Riscura.
Concentration risk is a financial term used to describe the level of risk in a bank or asset management company portfolio arising from concentration to a single counterparty, sector or country. The risk arises from the observation that more concentrated portfolios are less diverse and therefore the returns on the underlying assets are more correlated.
BPOPF’S P22.7 BILLION AT RISK
Headed by Principal Officer, Boitumelo Molefe, the BPOPF is the largest pension fund in Botswana. With around P65 billion in assets under management (AUM), BPOPF is the third largest pension fund in Africa. For quite some time now, the BPOPF invested 65 percent of its financial assets offshore, while only 35 percent was invested in Botswana. Using its investment ratio, the BPOPF should currently have approximately P22.7 billion in Botswana, most of which is invested in local listed equities, private equities and bonds, while some is held as cash by commercial banks.
In 2018, the BPOPF had about nine local investment managers, but over four of those have since been terminated over the years. The mandates which were held by the terminated asset managers were re-distributed amongst the remaining ones, increasing significantly, the concentration risk, according to a respected investment analyst in one of the leading asset management companies.
BPOPF’s investments locally were managed by Fleming Asset Management Botswana, Investec Asset Management Botswana, Stanbic Investment Management Services Botswana, Allan Gray Botswana, Messidor Investments, Kgori Capital Botswana, African Alliance Botswana and Botswana Insurance Fund Management (BIFM) and Capital Management Botswana (CMB). However, Molefe, the Principal Officer terminated over the years, contracts of four asset managers being Kgori Capital Botswana, African Alliance Botswana, Capital Management Botswana (CMB) and Fleming Asset management. By terminating four, out of nine asset managers, the BPOPF funds were re-distributed amongst the existing five managers, which significantly increased the concentration risk according to the investment analyst.
In an interview, Molefe admitted that indeed the concentration risk increases as investment managers reduce. Molefe said the BPOPF’s risk management’s mission is to implement a comprehensive and integrated risk management process that enables management to effectively deal with uncertainty and associated risk opportunity promptly, thus enhancing the BPOPF’s capacity and value.
“It is therefore important to continuously identify, assess, treat, monitor and report risks to give the board assurance that key risks are being identified and managed,” she said. According to the investment analyst, diversification is done to decrease asset manager concentration risk.
She said the idea behind this is to split the assets between managers that have different core competencies, strategies and/or approaches to investment so that should one manager underperform, then one would expect the other to perform better and average out the under-performance.
“This limits downside risk to Fund performance. It limits losses in value of the overall fund due to manager under-performance. It is therefore important for Funds and their Consultants to have a thorough understanding of the different investment houses and what their approach to managing money is so that they pair the managers that are the least correlated. Meaning that they perform differently in different market cycles and conditions therefore they should balance out in periods of high volatility when market movements can be extreme. This is what delivers diversification of manager risk,” she explained.
The structure of local funds is that 60-70 percent is invested offshore; this portion is usually managed by international asset managers. The local portion is then managed by local managers.
Therefore she said if one decomposes how the assets are actually split between managers there is a spread between multiple local and multiple offshore managers, decreasing the potential concentration risk.
According to the 2018 annual report (which is the latest available), BPOPF had invested over P10 billion in local equities listed on Botswana Stock Exchange (BSE), through its asset managers. Over P8.2 billion was invested in local fixed interest funds and bonds, while over P2.7 billion was invested in private equity. BPOPF is the single largest institutional investor on the BSE.
UB PENSION FUND, DPF BILLIONS ALSO AT RISK
The same asset managers used by BPOPF are also the same ones at Debswana Pension Fund (DPF), the second largest pension fund in Botswana as well as the University of Botswana (UB) Pension Fund, the third largest. Just a few months back, DPF terminated services of African Alliance, a decision that left the P8 billion rich pension fund with just four domestic asset managers. The investment managers are BIFM, Allan Gray, Morula and Investec Asset Management. All of them are engaged by the BPOPF. Currently, DPF manages pensions of the Debswana Group of Companies namely, DPF, Debswana Diamond Company, Morupule Coal Mine, De Beers Holdings Botswana, De Beers Sightholder Sales and Diamond Trading Company Botswana. The Fund has over 12400 members.
The University of Botswana (UB) Staff Pension Fund is the third largest in the country, with approximately P1.4 billion in assets under management (AUM). According to the UB latest available annual report, three asset managers, in BIFM, African Alliance and STANLIB Investment Management Services Limited were engaged, managing in excess of approximately P700 million.
RISCURA CONTROLS 85 PERCENT OF LOCAL PENSION FUNDS
It emerges that while the three biggest pension funds in Botswana; the BPOPF, the DPF and UB Staff Pension Fund, have engaged the same asset managers, which are very few, thus increasing the concentration risk, one investment consultant, Riscura has also been engaged by all of them to offer investment consulting services.
The three pension funds, account for over 85 percent of the total domestically invested pension funds portfolio. Riscura, a South African owned investment consultant firm, is responsible for investment consultancy for all the three largest pension funds in the country, which experts say leads to a similar investment strategy to be implored on over 85 percent of the locally invested pension funds assets.
Riscura advices DPF, UB Staff Pension Fund and BPOPF(And some others) on which asset managers to engage and what model of investment to approach. Experts fear that by having one investment consultant control almost all locally invested pension assets, the investment strategy, advice and choices will be the same. They worry that should the investment strategy, and/or advice fail, then the entire pensioners’ money locally could suffer bad investment decisions.
At BPOPF, Molefe abruptly said their investment decisions are reviewed from time to time to minimize and manage risk.
DPF Chief Executive Officer (CEO) Gosego January said Riscura was appointed as Investment Consultant in 2014 and further re-appointed in 2019.
“Since Riscura’s appointment, the Fund has noted the increased number of mandates that Riscura has been awarded by various pension funds within the Botswana market,” January responded to The Botswana Gazette inquiry. Further, she said in assessing the risk posed by Riscura’s dominance in the market, the Fund has established that the investment consultancy industry has a few dominant players across the region and globally.
She said while investment consultancy is important, DPF board makes decisions. She also said the quality of investment consultancy is continuously reviewed and monitored by management and the board.
The Botswana Gazette has sent a detailed inquiry to the UB Director at the Department of Public Affairs, Mhitshane Reetsang weeks ago, she was yet to respond. The inquiry sought to establish the risk posed by the dominance of Riscura and whether the University was aware of such.
At the same time, an inquiry was sent to Thembi Matabiswana, a Senior Consultant at Riscura satellite office here in Botswana. She would not respond after one week, saying that she was out of the country and that there was no one else who could assist in her absence. By press time, she said her superiors in Cape Town were looking into the inquiry.