Pension funds turn risky
With a dangerously large proportion of their investments in listed equities and real estate sector, Zimbabwean pension funds are fast turning to unlisted equities in search of diversification and value preserving instruments.
For the past few years, pension funds have had listed equities and real estate sectors as the only viable and rewarding investment destinations.
The other possible alternative, the money market, has been offering negative real interest rates following high annual inflation rates.
With limited options, pension funds have been piling into the equities and property markets and coupled with strong performances from the two, the stock market in particular, the total asset base for the industry is now strongly skewed towards quoted equities and real estate.
According to the latest 2021 first quarter pension industry report by regulator the Insurance and Pension Commission (IPEC), the total asset base for the industry increased by 494,16 percent from $29,81 billion as at March 31, 2020 to $177,12 billion as at March 31, 2021.
“The increase in the asset base was mainly due to revaluation of investment property and quoted equities, which increased by 413,45 percent and 459,03 percent, respectively.
“These two major asset classes constituted 71,84 percent of total industry assets,” reads the IPEC report.
This puts the pension industry at great risk if the two markets are to turn into bear markets. Last year’s developments in capital markets such as the closure of the ZSE
for more than a month and the continued suspension of some counters adds to this risk.
To guard against such risks, pension funds have increased their appetite for unquoted equities. During the period under review, the value of unquoted equities increased by 3 851 percent, to $29,24 billion from $0,74 billion recorded in March 2020.
According to IPEC, this increase is motivated by the industry’s drive to look for “value preserving instruments”.
“Furthermore, the significant increase in the value of investments in this asset class was due to proper classification by one stand-alone fund which was previously misclassifying it.”
The move is, however, without its risk as unquoted equities are not liquid and do not offer much regulatory protection to potential investors.
Other challenges associated with unquoted equities, include liquidity, valuation and corporate governance.
An industry expert who cannot be named for professional reasons said the increased appetite for unquoted equities is a result of asset reallocation over the past 2 years as most pension funds stayed away from fixed income investments.
“So to still achieve some diversification, they had to look at private equity to avoid over concentration in listed equities and/or property.
“We also had new private equity opportunities coming up, especially a new Private Equity Fund that was granted prescribed asset status (Mangwana Opportunities Fund).”
“Traditionally pension funds had been too risk averse and sought to avoid other asset classes such as private equity. But I also think the success of some PE funds such as Takura Capital could have helped change that attitude,” he said.
A fund manager who requested anonymity said investments in unquoted equities are associated with “liquidity risk and loss of capital as the sector is under less regulation and subject to less transparency”.
He, however, said the regulated equities market has not fared better either in terms of minimising risk.
“The regulated markets have been susceptible to more risk in the past as authorities did not protect investors against value loss and in most instances were instigators of value loss,” he said.
IPEC is, however, fully aware of the inherent risk and says it will soon “issue guidelines relating to investments” in such unquoted equities.
Meanwhile, there was growth in the pension industry’s assets in USD terms to US$2,10 billion from US$1,19 billion reported in the same period last year “largely on account of price discovery on major asset classes such as investment property and quoted equities”.
According to IPEC, the industry’s asset base of translates to a pension penetration rate of 16,54 percent, expressed as a percentage of the GDP.
“This significant proportion of assets to GDP confirms the important role played by the pensions industry in socio-economic development of the country,” IPEC said.-ebusinessweekly.cl.zw
