While the poor uptake of government bonds is attributed to pricing dynamics by asset managers, the government’s senior policy advisor Dr. Keith Jefferis is convinced that a lot of it has to do with structural issues.
“A lot of the issues are still structural rather than purely liquidity and pricing issues,” Jefferis said in response to a question from Salma Baduel, Absa’s Bank Botswana’s Country Treasurer, at a recent economic forum. Jefferis argued that the way the pension funds and asset managers operate makes it “very difficult” for them to move liquidity around from one asset to another, and “that needs to be addressed”. The point Jefferis was emphasising was that it all depends on the types of mandates that the asset managers are given by the pension funds. In a further discussion with this publication, he explained that when an asset manager gets a mandate, it comes with some restrictions about what they can do and cannot do.
“You can have a mandate called Balanced Prudential Mandate, which gives the asset managers a lot of flexibility to move assets between different categories,” he said in a phone interview. “The main categories would be bonds and equities, domestic or offshore.” With a Balanced Prudential Mandate, he said, asset managers have a lot of flexibility to move money between categories, including categories like property. “The asset managers have a lot of flexibility to move funds around between those different classes as their attractiveness varies within their mandate,” he said.
Under the current environment, the three largest pension funds in the country employ a Specialist Mandate Approach, Tshegofatso Tlhong, a Portfolio Manager at Kgori Capital, told the Business Weekly & Review. This, according to Tlhong, means that they appoint managers to manage only one asset class instead of a balanced mandate where the manager can invest across a combination of asset classes and decide how much to allocate to each asset class.
Industry players have confirmed that BPOPF, which dominates the market (about 75 percent of the sector assets under management or AUM) moved to specialised mandates circa 2013. Those mandates are asset class specific and therefore do not give managers the ability to make asset allocation calls (to sell from overpriced asset classes to invest in underpriced asset classes) as is the case with balanced mandates.
The CEO of the BPOPF, Moemedi Malindah, confirmed to this publication that BPOPF operates specialist mandates both locally and globally wherein each manager is appointed directly. “The decision to go this route was considered the best way to generate value for members by appointing managers directly for the asset class they are good at,” he responded to media questions. “It was also considered the most prudent way to implement and achieve the investment strategy of the Fund, minimising and regulatory breaches that could emerge, thus getting the best of both worlds.”
Malindah said the Fund has been structured in such a way that the overall strategic asset allocation is easily achievable, even when taking liquidity into consideration. He therefore believes it is able to cater for the different needs of its member base by offering different products. For example, he added, being specialist has made it easily possible to establish a pre-retirement switch product, thus preventing the notion of ‘one size fits all’ for its members.
At Debswana Pension Fund (DPF), Gosego January told this publication that the fund has invested in segregated mandates across listed domestic equities and domestic bonds. Allan Gray, Ninety One, Morula, Bifm, IPRO and Vunani have been appointed on specialist mandates, she said. The CEO explained that the Fund has chosen to adopt a responsible investment approach to deploying the funds of its members into investments that will earn adequate risk-adjusted returns suitable for DPF’s specific member profile, liquidity needs and liabilities. In pursuit of this, January believes DPF has followed a liability-driven investment approach. This approach necessitates carrying out an asset liability modelling process regularly.
“The outcome of this process is an investment strategy for each of the market channels of the Fund, namely the Market, Conservative and Pensioner Channels, which all have different return objectives,” she said, adding that Debswana Pension Fund implements this investment strategy through a process of risk budgeting and selection of appropriate investment mandates, taking into account factors such as time horizon, legal and regulatory constraints, as well as a universe of authorised investments. The aim is that as DPF continues to grow its AUM, it will explore the feasibility of investing in segregated funds. According to January, this process has already been initiated through the CBRE global property mandate, which is currently invested as a segregated fund.
Because asset managers are given more specialised mandates, Jefferis argues that they have less flexibility. For the overall allocation of pension fund money allocated to bond to increase, Tlhong opines that the pension fund itself would need to liquidate a portion of another asset class and reallocate the cash to local bonds. She added that this reallocation process only happens when funds review their strategies and decide that the member profile warrants such a change to their strategic asset allocation.
According to Jefferis, under the current dispensation, if, for instance, an asset manager is given just a mandate for bonds, that is all they can buy. “And let’s say they can only buy offshore bonds or equities, the mandates are restricted (and are) more narrow than the balanced mandates,” he said. His point is that the asset managers have to stick to one type of asset and do not have money to move between categories because of restrictions of mandates. “The pension fund might say, no I’m employing the specialised bond manager. But the amount of money is fixed and when returns of different classes change, those specialised managers don’t have the flexibility to move assets around unless they are given more money by pension funds,” said Jefferis. But typically, the pension funds do not have the skills to decide on a short-term basis where money should move.
As an example, Jefferis said when a billion pula is given to an asset manager to do something with it, that might be fixed for a number of years. Even if the asset they are investing in becomes more or less attractive, that amount will not necessarily change. His interpretation is that because there has been a shift away from Balanced Prudential Mandates towards narrow or specialised mandates, it means that assets or liquidity is not flexible in terms of moving as it used to be.