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Retirement Planning
Thursday, June 1, 2006
Getting good returns

The government’s program of sustained infrastructural development presents a huge opportunity for Socially Responsible Investments (SRI) by retirement funds.

Craig Aitchison, manager of Old Mutual Actuaries & Consultants (OMAC) in Gauteng says that while investment in infrastructure was hampered by the availability of projects in the past, this was about to change.
“With government embarking on a sustained programme of infrastructural development to boost the economy, there was now the prospect of a greater number of projects in which asset managers and retirement funds could invest. Finance Minister Trevor Manuel’s comment in the national budget, that government would give support to, amongst others, public private partnerships, was also very encouraging.”
Mr Aitchison says that the trustees of retirement funds could no longer afford to have blind spots regarding SRI and that a formal policy should become an integral part of their investment strategy. According to the 2005 Deloitte survey of retirement funds only 17% of funds had a formal policy on SRI in their Investment Policy Statement.
He says that an independent market survey conducted on behalf of Old Mutual among 65 retirement funds also revealed that less than 0,2% of assets of these funds had been invested in socially responsible investment vehicles. “The overwhelming perception is that SRI’s generally yielded a lower return and carried a higher level of risk.”
He says this perception was unfounded as the returns of funds investing in SRI projects compared favourably with their non-SRI counterparts. “For instance, several equity based funds have significantly beaten the return of the FTSE/JSE All Share Index over a period of three years to December 2005.”
According to Mr Aitchison overseas research indicated that investment returns were not diminished through the SRI approach. In the US, one out of every eight dollars was invested in socially responsible vehicles. He said that some of South Africa’s leading fund managers and investment houses had set up funds that invested in projects and infrastructure developments, including the Futuregrowth Infrastructure Bond Fund and the OMAM Ideas Fund.
A socially responsible investment is one that incorporates social, environmental and financial factors by applying the processes of screening, community investing and shareholder activism.
Negative screening originated in the 1970s during the years of apartheid and it effectively prevented capital to flow into companies with poor social and environmental performance. Positive screening seeks out companies with good track records. An example of a fund that does positive screening was the Oasis Crescent Equity Fund.
Community investing facilitates direct investments in projects or financial institutions that help develop low-income communities. Here the Old Mutual Ideas Fund was a prime example. It invests in infrastructural development projects such as the N3 toll road and the New Limpopo Bridge.
In South Africa the definition of socially responsible investments can be expanded to include Black Economic Empowerment. Shareholder activism includes the use of influence to bring about corporate and social change. An example here is Frater’s Earth Equity Fund that successfully interacts with Group Five, Sasol and Tongaat on corporate governance and social issues.
Mr Aitchison mentions some factors that retirement funds should take into consideration when adopting a formal SRI policy:
• Consistency with the purpose and objectives of the retirement fund;
• Consistency with overall investment strategy and philosophy;
• The risk/return profile of the entire portfolio must remain appropriate to the liability profile of the fund;
• Any SRI decisions must be considered within the framework of possible changes to Regulation 28 of the Pensions Fund Act; and,
• Clear communication to all stakeholders.

Copyright © Insurance Times and Investments® Vol:19.3 1st June, 2006
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