In the cold early hours of Thursday 24 February, Russia launched a full-scale invasion of Ukraine setting in motion a chilling chain of events that have spawned a grave humanitarian and economic crisis. More than a hundred days later the full scale of the global economic cost is still emerging but several things are already damningly clear. Food and fuel prices have risen rapidly fanning an already marked acceleration in inflation across the world. International sanctions on Russia as well as Ukraine’s failure to contribute its vital share to global food and commodity trade have worsened an already strained global supply chain. These adverse developments, resultant weak global sentiment and other evolving related challenges have thrown a curveball to the world’s nascent post-pandemic economic recovery. The IMF in its World Economic Outlook last April projected that global growth would weaken from an estimated 6.1% in 2021 to 3.6% this year, nearly a full percentage point lower than it had predicted barely three months earlier in January. The fund’s inflation projections are no better, with conflict-induced price pressures set to drive the rate well over 8% in emerging and developing economies. As the war rages on with no discernible end yet in sight the world will also contend with an aggravated set of pre-existing challenges that include COVID flare-ups, debt distress, climate change and multiple humanitarian crises. While it is almost unimaginable that there could be any positive spinoffs from the war it is worth noting that the higher oil prices may well help to hasten the shift to greener alternatives. The headwinds withstanding, some opportunities and positives may continue to subsist.

The adverse outlook on the war, growth, inflation and interest rate policies have also dampened investor risk appetite. The International Forum of Sovereign Wealth Funds recently reported that large institutional investors are retreating towards markets and strategies with less perceived risk such as for example shifting from equities to fixed income and cash balances. The report highlights how this trend has fuelled the highest emerging markets capital outflows in half a decade. Global ESG investment has also not been spared with a recent US Journal of Financial Planning survey suggesting this investment strategy “may have reached an inflection point”. Notable global examples of this trend include a record US$2 billion monthly redemption from US exchange-traded ESG funds this May and the poorly subscribed Impact Shares MSCI Global Climate Select ETF. In response, industry players continue to prescribe broadening the range of asset classes from which to draw uncorrelated ESG investments.

African pension fund asset allocations are strongly influenced by state regulation which partly limits the speed and flexibility they can exercise in their response to global economic changes including relatively strict curbs on offshore allocations in most countries. Limited domestic investment opportunities also present a challenge in their efforts to diversify asset classes and achieve local investment aspirations. Riscura’s Bright Africa research platform observed nearly five years ago that equities were the asset of choice in most of sub-Saharan Africa while fixed-income allocations reigned in West and East Africa. The only shared trend across the board was the slow growth in allocating to alternatives. Fast forward to today that has not changed materially with a Mercer study last year noting for example that South Africa’s weighted equity allocation fell slightly to just over 58% from around 60% the previous year. African pension funds face increasing pressure to better manage growing assets while navigating a turbulent global economic environment and this is evident in both the evolving debate on regulatory reform as well as mandate adjustments. Fund trustees are expected to find the optimal balance between investing offshore for higher returns while also investing locally to support economic recovery and development.
GEPF the continent’s largest fund recently announced that it would invest some US$1.6 billion in unlisted companies across Africa as part of its amended renewed mandate with PIC. While this represents a solid commitment from the fund it is less than half of what the previous contract had set aside, reflecting in part the peculiar institutional challenges at its fund manager but also likely the perceived risk level of investing in African alternatives. The choice of a slow and measured foray into foreign opportunities also serves to avoid leaving a disruptive gap in local funding especially on the Johannesburg Stock Exchange where as much as half of its assets sit. The poor performance of some of GEPF’s domestic investments and loans resulting in hundreds of millions of dollars in impairments has shone a spotlight on the need for trustees to more closely manage their relationships with fund managers and to expect them to have an active more direct role in their investments. Speaking late last year GEPF head Musa Mabesa said, “We have urged the PIC to get involved in the investee companies themselves and try and understand the root cause of challenges that lead to impairments and see how they can be assisted with a turnaround plan.” Another large South African fund Eskom Provident Pension Fund recently also invested US$20 million in an Africa-focused fund Africa Development Partners III along with Kenya’s KenGen DC Scheme among others. In West Africa, PenCom the Nigerian pension regulator issued in May, an operational framework providing guidance for pension funds seeking to co-invest with private equity funds to further diversify asset allocation into alternatives. These and other examples reflect the efforts of African pension funds to meet their core mandate of sustainably providing for retirees’ needs while contributing to domestic and regional development.

“The future is uncertain… but this uncertainty is at the very heart of human creativity.” These sentiments by the Belgian physical chemist and Nobel Laureate Ilya Prigogine aptly capture the spirit convening African pension fund leaders and the investment community at this year’s Pension Funds and Alternative Investments Africa Conference. The 5th edition of the continent’s biggest pensions and alternative investments gathering will run under the theme “Navigating the Recovery – Investing in Alternatives for Higher Returns and Sustainability” from the 14th to the 15th of July in scenic Mauritius. Deliberations will seek to find ways of managing risk, advocating sound regulation and achieving optimal returns. Special focus will be on the opportunity presented by alternative investments to achieve higher risk-adjusted returns and foster sustainable development. The event is supported by leading African financial institutions that have a track record of successfully deploying investments across the continent, including from pension funds. TDB Group is a premium financial group supporting a diverse range of sectors from small hydro development (Hydromax Limited Uganda) to education (Peter House Girls School expansion in Zimbabwe). The DBSA is helping to drive the region’s digital advance through financing optic fibre and data centre investments as well as co-funding South Africa’s largest renewable energy investment, the Redstone CSP project. Returning to support the conference again this year AFC is a multilateral finance institution established to help address Africa’s infrastructure needs and challenges. To date, it has invested over US$10 billion across 35 African countries. Finally, ABSA Group, one of the continent’s largest financial companies is also the largest agricultural funder in South Africa helping to facilitate investment, infrastructure and trade development to support the full African agriculture value chain as it delivers incomes and food security. All these esteemed financial institutions provide strategic platforms to collaborate with pension funds to achieve higher returns and sustainable development.