The Debswana Pension Fund has recorded modest growth in the past year thanks in part to offshore investments that offset the local equities that have not been performing well in the last two years.
DPF, the largest private pension fund in Botswana, recorded growth of 7 percent on the back of positive returns from emerging markets. The P7 billion fund in 2017 allocated 59 percent of funds to offshore investments while the rest was invested in the domestic market. The offshore investments are spread over global equities which have the largest share at 46 percent, global fixed income at 10 percent and offshore cash at 3 percent.
The past year was a good one for emerging markets which continued to outperform developed markets, supported by better earnings and economic growth prospects, strong asset inflows and higher commodity prices. The resurgence of emerging markets bode well for DPF’s offshore investments as global emerging equities portfolio came strong, delivering 26.3 percent in returns, a little below the MSCI Emerging Markets Index’s 38 percent return. Developed markets, as represented by the MSCI World Index, returned 23 percent last year.
DPF’s second performing asset was global equities, posting a return of 12.6 percent for the 12 months period. The emerging markets rally, the U.S. dollar’s depreciation and the resurgence of global growth were the top three drivers behind a double-digit rally in global equities last year. The relatively safe bond market which yields lower returns compared to equities failed to return positive returns, with DPF losing out 0.45 percent.
It is not surprising that the fund’s worst performing asset class was local equities, which have been under pressure in the last two years. In the 12 months ending December 2017, local equities’ performance was down by 5.8 percent, in line with the Botswana Stock Exchange’s Domestic Company Index’s downward trajectory. However the local bond market came through for DPF, delivering a return of 5.3 percent. Pension funds are drawn to bonds for their promise of modest, reliable returns compared to the high yielding yet risk equities. With inflation and interest rates in Botswana low, bonds have become attractive for investors who are looking for relatively attractive income streams.
The local investments were restructured last year as DPF made changes to asset allocation, shifting from balanced or generalised mandates to specialist mandates. The shift follows Botswana Public Officers Pension Fund’s 2015 decision to change its investment strategy from balanced mandates to specialist ones, a decision the biggest pension fund said achieved cost savings in terms of fees and also increased the opportunity to enhance returns through appropriate asset manager selection. On the other hand, The DPF board of trustees said their change is mainly for the purpose of ensuring focused and optimal performance by the local managers. The new asset allocation has been split into equity mandate and fixed income, all allocated to different local asset managers.
One of the beneficiaries of the asset allocations, Kgori Capital, which managed one of the equity mandates in the first quarter of 2017, lost out on the P237 million contract in the last quarter of 2017. The termination of the contract by DPF board of trustees followed shortly after the trailblazing local asset management firm found itself dragged in a financial scandal that involved Bakang Seretse, the then managing director and founder of Kgori Capital. While the young firm has sought to distance itself from any wrong doing, it has lost major contracts including those from Botswana Public Pensioners Fund.
The local billion pula pension fund industry has in the past came under fire for allocating a larger proportion of funds to offshore investments instead of the domestic market. The longstanding critics of the industry’s favoured allocation strategy say pension funds should invest more in the local market to boost the economy and create jobs. However, the fund managers have always hit back claiming lack of available opportunities for investments that could return attractive returns. Historically, offshore investments have always outperformed local investments given huge investment opportunities available outside the country.