Helfin's view on prescribed assets

ANC economic policy head Enoch Godongwana made headlines in August last year when he said the party is investigating the use of prescribed assets for pension funds to avoid getting an emergency loan from the IMF. Prescribed assets would force SA asset managers and pension funds to invest a certain percentage of their portfolio in bonds issued by the SA government and state owned enterprises.

The government appears to have changed position since then. Rather than forcing pension funds to buy government bonds, they have indicated that they are looking into allowing Reg. 28 funds to invest directly in state infrastructure.

Regulation 28 controls the extent to which retirement funds may invest in particular asset classes. Each of the asset classes has an allocation limit. Currently there is no allocation for investment in infrastructure and the ANC has indicated that it is considering introducing an infrastructure minimum for the purpose of boosting economic growth.

If the government changes its position again and does decide to enforce Reg. 28 funds to invest in government bonds, it might not necessarily be a problem for our investors. SA government bonds are currently yielding 9.49% Due to this we are already overweight SA bonds in the portfolios in order to capitalise on the attractive returns offered by these bond yields. Secondly, interest rates will most likely decrease in South Africa going forward and, as bond prices and interest rates are negatively correlated, this will increase the value of our investors bond holdings.  We consider the probability of this happening to be relatively low given the recent statement from the finance minister Tito Mboweni. If it does happen, the risk to our investors is the possibility of the SA government defaulting on their bonds which, while not impossible, we deem to be very unlikely.

In conclusion, the only risk to Reg. 28 funds is the event in which the ANC backtracks on its decision not to force pension funds to invest in government bonds and in conjunction the SA government later defaults on these loans. The probability of these two events is very low and as such we don’t feel that Reg. 28 fund investors need to be too concerned at this time.

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