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It’s part of the human condition that the more money you possess, the more liberal your views. It’s no accident that the wealthy suburb of Houghton in Johannesburg was the seat of the late Helen Suzman who, during the Apartheid era, was for decades the sole liberal voice in South Africa’s Parliament. In the asset management arena, the concept of Socially Responsible Investing is politically correct. But as Steve Nathan of 10x explained in a very well read recent article on Biznews.com, using your pension money to salve your conscience is fraught with problems, For one thing, socially responsible investment underperforms. Badly. For another, the criteria on which companies qualify is highly subjective. We invited Steve into the CNBC Africa Power Lunch studio to explain more. He did not disappoint. – AH
GUGULETHU MFUPHI: According to 10X Investments, socially responsible investing is not necessarily in your best investment interests, and that you should rather first secure an independent income, and then work on virtue. Joining me now to unpack this further is Steven Nathan. He is the founder as well as the Chief Executive of 10X Investments. Steven, perhaps before we look at why this is not such a good thing, walk us through what social responsible investing is.
STEVEN NATHAN: Well, social responsible investing aims to mandate investors to invest in companies that do social good in the country. That could be from an environmental perspective or from a social responsibility investment perspective.
ALEC HOGG: It sounds like a very difficult thing to work out, Steven. How do you know if what the company is telling you necessarily is what they’re actually doing without going out and auditing it?
STEVEN NATHAN: That’s one of our concerns. It’s very subjective. You can’t objectively say what this means and unfortunately, we at 10X believe that pension funds often become a soft target because there’s so much money there, that people can develop consulting services and put an unnecessary burden on retirement fund investors.. If you look at what different companies define as SRI-compliant companies, there’s a wide divergence so there’s a lot of subjectivity.
ALEC HOGG: We often hear from the more liberal investment people, that the returns achieved from socially responsible companies are higher than perhaps the returns achieved elsewhere. Do you go along with that?
STEVEN NATHAN: Well, that’s not borne out by experience in South Africa. If you objectively look at the SRI index on the JSE, over the last ten years it has produced a return: 1.6 percent per year less than what the All Share Index has been. In the context of a long-term saver – that is dramatic…underperforming by 1.6 percent, your final pension would be about 30 percent less and that’s before other costs. Typically, these ‘specialist type’ portfolios were then charged a higher investment fee because it’s deemed to be a specialist mandate, and then you’d need consultants to help you work out what you need to be doing here, so the burden on the investor is dramatically more. As you’ve said, people will come up – typically with most things, if they can have some research that supports their view – be it that governance works or SRI investing works, but the facts that we see in South Africa don’t support that.
GUGULETHU MFUPHI: The man on the street: how does he double-check that his pension fund is not investing in these SRI investment options, as you say, that underperform?
STEVEN NATHAN: Well I think it’s probably quite difficult, unless… Most people unfortunately don’t even know where their pension fund is invested, so they need to do some work in general and then obviously, specifically ensure that they’re protected from this type of issue. I think that if you look at many of the retail products, you would probably be asked ‘do you specifically want to be in an SRI portfolio?’ I doubt that you would be in a general equity or general balanced fund, and have this in your portfolio, unless you were asked by your advisor or possibly by the company selling the product. It’s probably more prevalent in the pension fund space – the bigger company space – where you tend to have many consultants and governance structures around this, where they would go into detail and say ‘what is our policy on social responsibility investing?’
ALEC HOGG: So Steve, it seems as though the people who should be focusing more attention are perhaps pension fund Trustees. Would they be informed of the kind of information that you’ve shared with us?
STEVEN NATHAN: Well we hope so. Once again, it depends on whom their consultants are, the strength of the Trustees, and the Trustees’ ability to focus on what really matters. Unfortunately, pension funds in South Africa are not doing a good job. The stats show that the vast majority of people fail to have nearly enough money to recover. The latest stats we have are getting even worse in that on average, people’s final pension is covering about 20 percent of their last salary and the number should be at least 60 percent. The trend is poor and clearly, it means that fiduciaries and those people acting on behalf of pension fund members are not doing a great job. I think not only SRI, but generally, as an industry, we need to lift up our game significantly and importantly, focus on what matters to the members. That’s what we’re saying at 10X. Does this add value to your members on a cost benefit basis or should you be focusing elsewhere, where there’s a lot of evidence of poor practices that are leading to poor outcomes for your members?
ALEC HOGG: It’s a thorny issue. I guess, if you’d said to your pension fund members or people who work for companies, ‘if you’d like to have 30 percent less pension at the end of the day if we invest this socially responsibly for you’, you’d get 100 percent thumbs down rate. Just to come back to something Berkshire Hathaway did, which was quite an interesting experiment – and maybe you can give us some insight from your perspective – Warren Buffet told shareholders that they could select charities of their choice, and then the company would put the socially responsible part of their business into those charities. Well, it was a disaster because some of them went for abortion clinics and others said they were pro-life etcetera, so it isn’t easy. It’s highly complex. Is there any way – which you can suggest – that people can operate if they want to do good?
STEVEN NATHAN: It comes back to my point that pension fund assets are a soft target. These are all good objectives. There are many good objectives in our country and elsewhere, but you must ensure that you meet your primary objectives. The primary object is, ‘what is in the long-term investors’ best interests and how can we best go about doing this?’ Unfortunately, the more distractions you throw at trustees, decision-makers, and investors…you’re going to get a worse outcome because you’re going to deviate from what really matters. If Warren Buffet wasn’t able to solve the charity dilemma, I certainly don’t think I can do a better job. What we can do a better job at, is focus on what we’re here for: we’re here to look after people’s long-term retirement savings, and we hope that if they do have a social responsibility objective, that they fulfil that in other ways, but not necessarily putting another burden on us Fund Managers, administrators, and trustees of long-term savings.
GUGULETHU MFUPHI: Steven, what do you make of costs on investment vehicles?
STEVEN NATHAN: Well, costs are unnecessarily high. National Treasury came out last year and said that in a global context, costs are high in South Africa. They said that fees on average, should be reduced by half and we agree with that because we for example, are able to operate at a total cost of one percent if not lower, for most retirement fund investors. The average in South Africa is about twice – if not three times – that, for some retail investors. That’s the kind of issue we should be focusing on, as an industry and as a trustee. How can we bring costs down? If you look at specialist mandates, like introducing SRI-type targets, you’re not reducing costs. You’re increasing them, because it’s much more expensive to get expertise around that and there doesn’t appear to be an obvious benefit. In fact, your returns seem to be lower.
ALEC HOGG: Is your message being heard?
STEVEN NATHAN: Well, this is a big industry. There are many powerful and vested interests, so it is being heard in a small forum, but we’d like it to get more publicity. I think National Treasury has done a fantastic job of starting the conversation and starting it from an independent source. However, I think all stakeholders…the media and the retirement fund industry – hopefully – we need to be more vocal and we need to get simple principles across, for people and trustees to understand. Unfortunately, trustees have this massive responsibility, but they’re just ordinary people, ordinary employees, they don’t have the expertise, and they have this industry that’s coming between them and their employees’ money that thus far, has displayed a very strong profit and self-interest, and hasn’t done enough to look after the interest of the ultimate client.
ALEC HOGG: No doubt those trustees are well intentioned, but not always as well educated.
STEVEN NATHAN: Without a doubt, it’s one of those unfortunate flaws in the system, that you’re asking people to make decisions and they have no expertise and experience to make those decisions. Therefore, they have to rely on someone. Whom do they go to?