As most retirement fund stakeholders will know by now, all pension funds are required to invest a minimum of 1.75% and a maximum of 3.5% in unlisted investments by latest 30 September 2015.
The way our legislation (regulation 29 of the Pension Funds Act) has been structured, such statutory investments by pension funds have to be done via a special purpose vehicle (SPV) which must be either a trust or a company and has to comply with detailed statutory requirements over and above those that in any event already apply to companies and trusts. For all intents and purposes the SPV is similar to a unit trust, the much more common vehicle for the individual investor. It pools capital from many different investors (pension funds and other investors) and uses the capital received to invest in unlisted investments.
Similar to unit trusts that have to be managed by a unit trust management company, an SPV has to be managed by an unlisted investment manager (UIM) that has to comply with detailed statutory requirements. The structure of SPV/unit trust managed by a UIM/ unit trust management company is intended to protect the interests of the investors. The capital of investors is ring fenced and the misfortunes of the manager will not affect the moneys of the investors, although poor investments made by the SPV will produce poor returns for the investor. Usually the investments made by an SPV or a unit trust are spread widely amongst different investment objects so that the demise of one investment object will not wipe out the investors capital even though it will impact negatively on his returns.
To put unlisted investments into a more comprehensible perspective, let's first look at where the commonly used unit trusts typically invest. They commonly used unit trusts invest in what is referred to as 'conventional asset classes' such as shares, property, bonds, treasury bills and cash. Investments other than cash and treasury bills are mostly listed on an exchange which means that prices can be determined easily by referring to the relevant exchange where the asset is listed. These exchanges are local as well as off-shore exchanges.
Unlisted investments in contrast are what the term says, not listed on any exchange which means that prices cannot be obtained from an exchange. In practice it is very difficult to determine the prices and it requires experts to derive at what they will determine to be the fair value of the investment. If such an investment were to be sold at valuation date, it is unlikely that the investor would actually obtain the price at which the investment was valued. Of the SPV's that have been approved by Namfisa to date, some invest in shares of companies not listed on any stock exchange, some provide loans to companies and other entities such as municipalities and or invest in debt instruments (i.e. bonds) issued by companies and institutions.
One of the advantages of unit trusts investing in listed companies and other listed debt instruments is that prices are readily available and can be determined exactly on a daily. When one investor invests in the unit trust while another investor withdraws an investment from a unit trust, each investor pays for or receives exactly what the investment was worth at the time and there will be no cross-subsidisation. This is not the case in an SPV where one investor may have invested based on the valuation of the underlying investment. The next day, on which another investor withdraws his investment, that underlying investment is sold at either a significantly higher or lower price. This means that the investor who withdrew his investment would receive either significantly more or less than what the investment had been valued at the day before and the balance between what he received and what it was valued for the day before either accrues to or reduces the value of the remaining investors.
Unfortunately pension funds have no choice in this matter, it being a statutory requirement, and pension fund members are dammed to accept whatever the outcome will be for them.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.