‘You can’t invest in a government at war with itself’

Andrew Canter is not the most conventional investment manager you have ever met. He is known for delivering lectures in his socks, cycling rather than driving, and sharing his opinion without fear or favour. He is something of a maverick in the industry.

But do not let that distract you. He is also known for a razor-sharp intellect. Thus when the organisation that he leads, investment manager Futuregrowth, announces via Bloomberg that it would no longer lend money to six of South Africa’s largest state companies because it’s concerned about how they are being run, government infighting and threats to the independence of the finance ministry, the rest of South Africa pays attention.

The rand reacted negatively to the news, falling as much as 2.3% to an intraday low of R14.73 against the dollar. It was also the worst performer among 31 currencies Bloomberg tracks.

Futuregrowth is one of the country’s biggest investment managers and manages around R170 billion of assets – mostly for pension funds, including the government’s Public Investment Corporation. It is a signatory to the six principles of responsible investment – compliance and good governance among other things – principles that Canter believes in with religious fervour.

If you think this is tick-box nonsense, bear in mind that Futuregrowth called African Bank correctly, based on concerns about compliance. They exited the bank in time and saved their clients a lot of money.

So perhaps it should not have come as a surprise that the bank is the first to act in this regard.

During an interview with Moneyweb’s Siki Mgabadeli on the SAfm Market Update Canter said it appears as if government is at war with itself, referring specifically to last week’s announcement by the presidency that it would create a SOE council, headed by the president, to oversee SOEs.

“It puts in question how SOEs themselves are managing their own governance and independence,” he said.

He continued that Futuregrowth’s investment committee talked about these developments and about providing loans to these entities. “We cannot rationally take a five- to 10-year view on their financial status and that means we cannot give new loans to them. It is not a shot across the bow. It is not a political statement. It is merely saying that there is uncertainty and in the face of uncertainty investors have to be more attentive and ask more questions, and that is what we are doing.”

He said Futuregrowth was evaluating a possible new loan and the evaluation process brought this to a head.

“We were in the process of approving an additional R1.8 billion to several entities and when it came to the credit committee we asked: Can we take a 10-year view on these businesses? There were some unanswered questions and we had to suspend that decision and open up those discussions with the entities.”

Access to information

Canter said asset managers could not do in-depth financial, risk and governance analyses into SOEs as they can on private businesses. “Usually when it comes to SOEs you read the annual report and look who is on the board. We want more detail now. We want to ensure that there are not politically connected people on the investing committees, credit committees and procurement committees who may have different agendas. We want to ensure that when we provide loans to these entities that the decisions are actually in the best long-term interest of the companies and not for some other personal agenda.”

Canter said these SOEs are big entities with long track records. “We don’t think we will find nefariousness. We think we will find positive answers. But at the moment we can’t make decisions.”

Canter said the entities’ reaction upon informing them of the decision was not “as hostile” as it expected. “I think they understood. We all read newspapers and see what is going on in the country, we all have questions and fears, and uncertainty and that is not a political thing. It is an observation of the world around us and I think they do understand.”

However, Moneyweb spoke to two economists with intimate knowledge of banks’ credit procedures on condition of anonymity. Both were surprised at Futuregrowth’s decision, saying that it may have a much wider impact than merely curtailing their risk exposure.

One economist said in many cases the SOEs play a crucial role in the economy and any action to curtail their activities will have a massive knock-on effect on the rest of the economy. This is especially the case for companies such as Eskom (electricity) and Transnet (transport).

“It is not as if the funder decides to pull funding for a car dealership that will have limited impact on the economy. If there are electricity shortages the impact will be much greater.”

According to Bloomberg, the fund manager will only resume offering loans and rolling over existing debt once it has determined that what it sees as proper oversight and governance at the companies have been restored.

The companies affected are Eskom,  Transnet, SA National Roads Agency (Sanral), the Land Bank of SA, the Industrial Development Corporation (IDC) and the Development Bank of Southern Africa.

The first inclination of some commentators was to dismiss the Futuregrowth decision as “merely a political statement”.

Ratings Afrika CEO Charl Kocks advises against this.

“I doubt this is political. I would imagine that Canter has done his homework. As a responsible investor you have to consider governance issues and whether there could be a smell to what you are funding. I expect Futuregrowth has decided that there are risks that they would prefer not to take.

“Canter has strong views,” he adds, “but this would be a commercial decision; this is not playing politics.”

Whether other institutions will follow remains to be seen.

“A move like this? Well, that takes courage,” he says.

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