South African State Pension Fund Looks to Expand Unlisted Assets

(Bloomberg) --

South Africa's Government Employees Pension Fund is planning to invest more of its about 2 trillion rand ($137 billion) in fixed-income and unlisted assets as the country faces a possible credit-rating downgrade by Moody's Investors Service next year.

It's also still seeking to increase its investments outside South Africa to reduce risk of overexposure to locally traded companies, GEPF Principal Executive Abel Sithole said Thursday at the release of its annual report for the financial year to the end of March.

South Africa's economy unexpectedly contracted in the third quarter, which means full-year economic growth could be even lower than the 0.5% projected by the Treasury in October. The shrinkage raises the risk of a credit downgrade by Moody's as soon as the first quarter of 2020. That would rank the country among the junk, or non investment-grade borrowers.

“One way to prepare for a downgrade is to start positioning the portfolio on the unlisted and fixed income side,” Sithole said. Even so, the pension fund can't take “knee-jerk” decisions and needs to consider what is good for the country. Moves to take more money offshore would also not happen “overnight,” he said.

The GEPF has more than 90% of its assets invested in South Africa and taking more cash offshore could be a blow to South Africa's listed companies. Meanwhile, increased investment in unlisted companies may help back new industries, Sithole said.

Buying more unlisted assets would need to be “done right,” Sithole said. The Public Investment Corp., the fund's biggest manager, has been the subject of a judicial inquiry into whether the entity deviated from its mission to best safeguard pensions for more than 1.2 million South African state workers. The PIC has suspended staff that it says flouted governance and approval processes when making investment decisions, several linked to unlisted assets.

Meanwhile, Sithole said the GEPF has increased scrutiny of the PIC to ensure it has an “adequate line of sight in those areas where there has been concern over what has been done in the past.”

To contact the reporter on this story: Janice Kew in Johannesburg at jkew4@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Robert Brand, Alastair Reed

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