Andrew Canter upbeat about direction SA’s going, despite its economic challenges

JOHANNESBURG — The Chief Investment Officer of Futuregrowth, Andrew Canter, was in the spotlight in 2016 when the fund manager took the unprecedented step of halting lending to six major SOEs. After reviewing these SOEs and conducting further reviews, Futuregrowth cleared some of them. Earlier this year, Futuregrowth also made the news again when it released a report entitled 'SOE Governance Unmasked', in which it decried the lack of transparency at SOEs in South Africa, especially for those companies with listed bonds. In this interview, Canter provides updates on these two previous developments as well as his views on why he's still positive about South Africa, despite a current technical recession and a weak rand. (I apologise for some small parts of the audio where my dog can be heard barking in the background. The interview is so good that I couldn't cut it out) – Gareth van Zyl.On the line is the Chief Investment Officer of Futuregrowth, Andrew Canter. Andrew, it's a pleasure to chat to you. We currently have the Zondo Commission into State Capture in South Africa and I thought it was interesting that in a recent article, you were quoted as saying that we almost lost the country. Do you think then that the days of State Capture and cronyism are fully behind us?.Look, it seems to us that the direction of travel of the current administration and the way they're actually shining a light on what's gone on with the malfeasance and the State Capture is a very good sign. The direction of travel is the right way. Obviously, how it plays out in elections and politics and policy… We all have to wait and see but we're getting more comfortable than we certainly were a year ago..___STEADY_PAYWALL___.So, you're feeling more comfortable despite the fact that we're in a technical recession at the moment?.Well, that's a different kettle of fish. Obviously, this is a real problem. We've had ten years of relatively weak economic growth and that has obviously had consequences as well as the inefficiency of governance. So the debt to GDP has continued to be worse. The cost of the funding has gone down because our credit ratings have been degraded and that's a bad situation. By the way, that creates huge political risk. If you have rising unemployment and lack of opportunity, that clearly creates political risk and justifiably so. People want to live so low growth is not a happy outcome for any of us..And, in 2016, you also took the unprecedented step of halting lending to six major SOEs until they conducted governance reviews. What's the latest update on those six? Who has met the grade and who hasn't? .Okay, I'm going to answer the question a little obliquely in the sense that when we engage with the SOE, we didn't really understand – in fact, nobody understood SOE governance – I think, probably within government and outside the government. We found out that each SOE has its documentation, its own board charters, policies, and procedures. Many would have assumed that there was some standardisation about governance in SOEs, but in fact, there was not much. So as we dove into the topic, we knew there were problems. But more accurately, we didn't know there were problems but we had a strong sense from the news flow that had been coming out. What we sought to find out before we pour any more client Pension Fund money into these entities, do we have a reasonable certainty that they have been well-governed and that we're going to get the money back for our clients, and that we're not just throwing money into a black hole? .That's what we engaged in. In doing that, we first engaged, in sequence, Land Bank, DBSA, and IDC – the three lending agencies of the government: Land Bank lends for agriculture, the IDC lends for industrial development, and the DBSA for infrastructure development. And we found out that actually, they have pretty good governance. Each one is different. Each one has different founding documents and board structures etc. But each one with reasonably robust and acceptable governance. Now, in every one… there were tweaks, and this was the key learning, if we move forward in time to now, I say the direction of travel is right but actually, it's about cementing what we've learned of governance and what the government itself has learned about governance so that we can improve the standards and prevent corruption in the future. .So, those three entities, from what we could tell didn't have corruption, from what we could tell. They have good governance, good committees, well-structured boards, well-considered boards, and the right people there. We didn't see a lot of political appointees etc. Each one… sure, there were some tweaks, there were some tweaks to policies you wanted to see – whether that was a PEPs policy (that's politically exposed persons policy), how they deal with PEPs, whether they introduced cooling off periods about whether they could do business with the entity after they left, whether they reduced limits of authority to what management alone could approve (and that's up to the board committee), whether the committees were properly conducted etc. Minor tweaks, but nothing huge. So, we accepted that and cleared those three by the end of 2016. SANRAL was a slightly different kettle of fish. Internally, we think SANRAL is a mission-driven company aiming to build and maintain the nation's roads and in terms of tender stuff and procurement policies, they looked pretty good with some minor tweaks. .The problem with SANRAL is that the SANRAL board is appointed in the Minister's office alone without any board nominations committee that we saw. Further, the SANRAL Act limits the SANRAL board to only 8 members and, in our view, you can't run an entity that comprises only an 8-member board because there are multiple committees plus the board itself. And so we couldn't clear SANRAL (in a sense that we're happy). We cleared SANRAL in the sense that we said, look, we'll trade their bonds again and their basic internal governance is okay. And they also made some tweaks – ie a cooling off period, limits on authority. The last two outstanding were Eskom and Transnet and with the news flow over 2017, we tried to engage but what do you do in those situations? So, we've never to our mind cleared them nor in effect can we until basically there's new policies, procedures, and probably people as well..Earlier this year, Futuregrowth also released a report entitled 'SOE Governance Unmasked' in which you essentially decried the lack of transparency at SOEs in South Africa, especially for those companies with listed bonds. Was there any feedback to that report from SOEs, government or even the JSE?.It was pretty well-read and we have had some dialogue with some people in the new administration in government, in some of the departments, sharing our learning. The intention of that report was really to say that nobody's done this work before. The ratings agencies haven't done it. The banks hadn't done it. Investors hadn't done it. The government hadn't done it. We did this work because we wanted to make sure that those learnings were shared (or as the old saying goes 'never waste a good crisis'). So that was the intention of the report. It was just to share those learnings, create a dialogue about it and also, in particular, to alert investors who are capital providers. Our role in society is to be allocators of capital through efficient, well-run enterprises to build that nation and it's not just Futuregrowth's role. It's all investors' roles. It's all institution and management so we certainly want to share our learnings with our compatriots in the industry in a very openhearted and generous way. .Is our country unique in terms of its lack of transparency around listed bonds?.Okay, so now we move to the bond market itself. So far, there have been general comments about governance and such. Okay, the bond market is in itself, another kettle of fish. Let me go down that road a little bit. The bond market standards, generally speaking; most people think, "Well, it's a listed bond market. It must be safe. It's like the equity market." You know, you think there are 150 years of rules, laws, company law, minority protections, and fairness protection for investors etc. Well, in equity there is. If you own one share of a company, your one share has all the same protections as Old Mutual's billion shares, for eg. It is a comfortable protection. It is absolutely untrue in bond markets. There are various classes of debts. For example, a bank may make a loan to a company and have a mortgage bond over the head office of their buildings but at the same time, the same bank may sell a bond on the listed corporate bond market, which has no security whatsoever so the company goes bust. The bank takes the building and the institutional investors/Pension Funds get nothing, for e.g. The level of reporting standards required by the JSE, the level of directors' skills, competencies, and disclosures and the general level of investor protection is incredibly low. It's actually pathetic. It's outrageous. If you're going to be a director of a JSE-listed company with a share, you have to be fit and proper, you'd have to never have been convicted, you'd have to have never been barred from entry or profession – there's about 12 different things. Whereas if you want to be a director of a company that issues bonds, you only have to put your name down. That's all. So that's ridiculous. So, let's just say that right now, bond market standards are really not the same as what people expect from a public listed capital market that sells bonds to people's grandmothers for Pension Funds..It goes further than that, if I may. With the governance reporting… now here you have bondholders lending money to all those six entities we just named… Remember, the reason we named Land Bank, IDC, DBSA, SANRAL, Eskom and Transnet is not because we thought they were bad. We named them because they issue bonds in the public capital market. And a public capital market has similar attributes to the freedom of the press. You can say whatever you want. It doesn't even have to be true, by the way, as we've seen with some short shout strategies from some investors. They shout and make sure they buy it back cheaper. It's a free market. It's a free market of ideas and the issue is for that market to stand up to scrutiny, public disclosure, and public discussion. So, we named those names because they were issuers in the public capital market. .However, the point is that we could not then get any information about the governance standards of these entities. We couldn't know how people got on the board, what the appointment processes were, what say the procurement committee's mandate was, who the members of that committee were, or whether any directors changed by the way, etc. There was absolutely no reporting for people providing billions and billions of Pension Fund capital to these entities. We had no information about the state of the degradation or the quality of the governance. So we were genuinely surprised when we looked at Land Bank and we were blown away by the high quality of the governance. Nobody told us before. There was no disclosure requirement. Likewise, with other entities, you found out they had shocking governance. We didn't know that either. What we're pushing the JSE for is to stop the enabler of corrupt practices and start being a protector of investors' capital and the country..Are you confident that they will take heed to what you suggested? .I think the combination of what's happened with the nation (we almost lost the nation and we all know that now) … It was a systematic attempt to capture the state. The SOEs were the sharp end of that wedge. What's happened with the SOEs' public capital market issuers – their credit degradations and with what's happened in private sector companies – let's not just think it's SOEs. This has happened in private companies as well. The shenanigans are out from listed bonds of corporates that are equally bad and you've seen that in their share prices. So, I think the JSE has seen the writing on the wall. They've heard the arguments and they are now engaging and, in fact, investors are also engaging with a more uniform voice. We've been through the defaults of the ABIL's and the Steinhoff's and various others and how to work them through under a very, very adverse JSE regime – a really unsupported regime for helping us protect investors' interests. Institutional investors now realise that they've tolerated weak bond market standards for too long so the JSE is listing. That's the short answer..And, just a last question: what are your thoughts on where South Africa is headed at the moment? Are you optimistic or pessimistic?.Look, as I said, right now it feels like the direction of travel is generally good. Now, it's hard to say that on a day when the Rand gets clobbered again and interest rates are rising, and the economic growth is negative and we're in a recession. It's almost oxymoronic but the fact is that as a nation and as I travel overseas and listen to other African countries or even Africa as a continent make its pitch, South Africa stands head and shoulders stands above the other countries in Africa as an investment destination because of the constitutional framework and because of the markets and policies that we operate under. We still have rule of law here and so I do think I can be optimistic on a longer-term view as long as the direction travel remains in the right direction and, ultimately, if we can grow, get job creation and we take the heat off of some of the potentially disastrous political policies that might come out..Andrew, thank you so much for taking time to chat to me. It's been a pleasure..Thank you.

Andrew Canter upbeat about direction SA’s going, despite its economic challenges

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