In September 2018 the average prudential balanced portfolio returned -2.00% (August 2018: 3.75%). Top performer is Investec (-1.45%), while Nam Asset (-2.97%) takes the bottom spot. For the 3-month period, Investment Solutions takes top spot, outperforming the ‘average’ by roughly 1.15%. On the other end of the scale Momentum underperformed the ‘average’ by 1.40%.

Investment regulations reduce your prospective pension by 27%

Namibian pension funds seem to have a serious problem and are unlikely to meet the implicit expectations of the retirement benefit one should expect them to provide. Typically pension funds are expected to produce an income replacement ratio of 2% per year of service. After having worked for 40 years, the expectation is that the fund member would receive a pension before commuting any portion of the retirement capital of 80% of the salary he earned just prior to retirement.

To achieve this implicit salary replacement ratio, pension fund assets should return roughly 6% above inflation, before asset manager fees. To achieve this return, it is assumed that funds would in practice invest around 75% in equity. The balance of the funds’ investments would be invested in other conventional asset classes (property, bonds and cash) in varying proportions depending on investment market conditions.

We know that investment regulations place certain constraints on asset managers and this may impact investment returns. Namibian funds are for example required to have invested in Namibia at least 45% of their assets by 31 March 2019, with a maximum of 10% that may be invested in dual listed shares. In practice this means that managers will invest around 48% plus in Namibia just to make sure that they do not expose their fund clients to any risk of penalties for being below 45%. Similarly, investment managers would in practice not invest more than 70% in equities in total to avoid any penalty for exceeding this cap. History corroborates this modus operandi of asset managers, who had on average invested 41% in Namibia at a time when the minimum was still set at 35%, given that an increase to 40% was anticipated already. The constraints placed on asset managers may produce lower returns on the various typical asset classes investment managers invest in, as they cannot freely invest in the highest yielding assets that may globally be available.

Assuming Namibian investment managers were to maintain maximum equity exposure of 72% as the highest yielding asset class, so as not to fall foul of the 75% cap too easily and assuming the asset classes would generate the returns they did from 1900 to 2016 (source – Prudential Investment Managers), table 1 shows that the managers should be able to generate a return of 6.3% before asset manager fees, typically around 0.8% or 5.5% after asset manager fees thus meeting the implicit return expectation of the traditional pension fund model.

Table 1

If we now use the above table but bring in the minimum Namibian exposure of 47.6%, so as to not fall foul of the 45% minimum Namibian allocation, apply the average asset allocation of Namibian asset managers to Namibian equities and allocate the balance in accordance with the spread across all other regions and asset classes that the average manager currently applies, this will reduce investment returns by 21%...