PIC chasing more than returns

Reminds stakeholders that its mandate is wider than absolute investment returns, but it still has a huge impact on the JSE.

Whoever looks at the returns the Public Investment Corporation (PIC) achieves on the massive investment portfolio of R2.7 trillion that it invests on behalf of government employees and the Department of Labour is bound to remark that the returns are lower than those that other fund managers achieve.

The commentators usually add that the PIC should hand more money to private asset managers, if not all of it.

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Listen/read: PIC assets under management hit record high

However, the PIC points out that its investment mandate includes other considerations, whether people agree with this or not.

Finance Minister Enoch Godongwana says in his introduction to the PIC’s latest annual report that investment decisions are geared towards “striking an optimum balance among the need to deliver solid financial returns for clients, economic development in the country and the African continent, and delivering social returns: job creation, transforming the economy towards broader participation and inclusivity, and promoting environmental sustainability for the country”.

David Masondo, chair of the PIC, says it aims to generate social impact alongside financial returns, as mandated by its clients and the PIC Act.

“The PIC allocates funds to impact investments that intentionally target transformation, social and environmental outcomes alongside financial return. These include investments in investee companies of black people and women, and infrastructure such as renewable energy projects to support South Africa’s energy transition and expand access to electricity and logistics.

“By embracing sustainable investing, the PIC contributes to a more just and sustainable future for SA and the African continent, achieving long-term investment performance and fulfilling its fiduciary duty to its clients, their beneficiaries and society,” he says.

‘Volatile’ year

Masondo and PIC chief investment officer Kabelo Rikhotso also pointed out that the operating environment during the year to end March 2024 was volatile due to global events.

“Domestically, businesses of all sizes continued to face numerous headwinds, including structural challenges such as disruptions in electricity supply, as well as disruptions in supply chain; unemployment remained persistently high; and social service delivery experienced challenges, accompanied by worsening crime levels,” says Mosondo.

“Persistent inflation spikes resulting from geopolitical tensions led central banks worldwide to raise interest rates, directly affecting already-constrained consumers.

“These factors affected the PIC’s operations, including the cost of doing business, valuations, the entry price of acquiring new businesses, exiting investments, the profitability and sustainability of businesses and new listings and delistings on the JSE.”

Rikhotso adds: “Major private equity funds have exited SA, fewer deals are being closed in private markets and fund raising has been difficult in both listed and unlisted markets.”

Biggest fish in a small pond

Another factor limiting investment returns is that the PIC is intentionally a very big fish in the JSE’s small pond in that it invests mainly in SA companies.

Looking at its investment portfolio, the lack of investments in the large international companies with secondary listings on the JSE is obvious.

At the reporting date at the end of March 2024, only 8.8% of the total investment portfolio was invested in foreign equities and only 1.6% in foreign bonds.

In contrast, other asset managers and private investors would tend to invest close to 45% offshore – the maximum allowed – and then invest heavily in shares of those international companies listed on the JSE with the other 55%.

Rikhotso says global equities recorded absolute returns in excess of 20% in dollar terms during the year under review. The JSE chalked up a paltry 1.5% in the 12 months to end March 2024.

The PIC is also what one can consider overweight in bonds with around 43% of the funds under management invested in mainly SA government bonds. It also invests heavily in bonds issued by state-owned enterprises.

Read: PIC’s assets under management reach record R3trn PIC has devised a strategy to support SOEs

Rikhotso says the PIC had exposure of R4.7 billion in Transnet short-term bonds (maturity by end March 2024). The PIC remains one of the biggest investors in Eskom with exposure of approximately R83 billion at year end.

Source: PIC Annual Report 2024

The PIC also likes property more than most asset managers, with a total exposure of 4.2% to listed and unlisted property. This translates to R59 billion of the portfolio, ranking the PIC’s clients among the largest property owners in SA.

Investing 31% of R2.7 trillion – it works out to R840 billion – in SA companies on the JSE means the PIC holds significant stakes in many companies.

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Interestingly, the largest shareholdings are in companies that the PIC got stuck with.

It owns nearly 87% of Efora Energy, an African oil and gas company with interests in Egypt, the Democratic Republic of Congo, Malawi and Botswana.

It is stuck with 31% in Ayo Technology and 30% of the US Erin Energy Corporation, which filed for bankruptcy in 2019.

It is also stuck with nearly 17% of Tongaat and a few shares in Comair.

The PIC owns 45% of Mahube, which aims to build a portfolio of infrastructure assets, such as interests in renewable energy projects. It owns a massive 66% of fledging health group RH Bophelo.

Source: Based on data in PIC annual report

The PIC annual report included a list of all the listed (and unlisted) shares that it holds on behalf of clients, grouped by sector.

You can view the list here.

The following trends are noticeable:

• It is invested in 24 property trusts, holding between 18% and 23% of most of them;
• It owns stakes of around 16% in each of SA’s major banks;
• Its portfolio includes 26 consumer services companies and 16 consumer goods companies;
• Stakes in mining companies are smaller than one would expect; and
• Its interests in healthcare companies are quite large, with shareholdings of more than 20% in several companies.

Interesting decisions

The portfolio shows a few interesting decisions by the PIC’s 260-member investment team.

The PIC owns nearly 19% of Clicks and 12% of Dis-Chem, 17% of Shoprite and nearly 23% of Spar, but only 10% of Pick n Pay.

Chicken farmer Astral is the favourite food company, with the PIC buying 27% on behalf of its clients.

The preference for local shares over international shares can be seen by the PIC holding nearly 22% of Naspers, but only 3% of Prosus. This might also reflect Naspers’s large discount to the value of Prosus and Tencent.

It owns less than 3% of both British American Tobacco and Richemont, usually favourites in investment portfolios.

It has only small holdings in Anglo American (6.3%) and BHP (less than 1%), although the small stakes in the big groups add up to billions.

The PIC bemoaned that it was underweight in banks and mining shares, especially gold mining companies.

It nevertheless owns 19% of Gold Fields, nearly 15% of Harmony, 15% of AngloGold and 17% of Sibanye-Stillwater. And it prefers Implats (nearly 18%) and Northam (20%) to AngloPlats (4%).

In total, the portfolios managed for the Government Employees Pension Fund, the Unemployment Insurance Fund and the workers Compensation Fund own shares in 179 companies listed on the JSE, equal to two thirds of the listings.

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