Unpacking the largest South African investor in the JSE

Skip to the end to find out how the PIC is the largest domestic investor in the JSE. 

The Public Investment Corporation (the “PIC”) is a wholly owned state company. This means it is owned by the South African Government, with the Minister of Finance as shareholder representative and it was incorporated in 2005 in accordance with the Public Investment Corporation Act, 2004.

Wholly owned in this context means exactly what it sounds like and how the old 1973 Companies Act correctly defined it, a 100% shareholding. 

In essence, the PIC operates in a similar manner to private sector investment managers. Most of us should be familiar with the likes of Allan Gray and Coronation. It is not a government department and it has its own autonomous board. However, where the PIC differs to private managers is in its objectives.  The PIC is required to fulfil a dual mandate. On one hand, the PIC must generate returns on behalf of its clients and on the other, the PIC must contribute to the development goals of South Africa. The PIC has taken the latter quite seriously and there are a number of cases in which they have strongarmed JSE companies into promoting transformation on the board of directors.

Who are the clients?

According to the PIC official website, most of its funds “belong to workers.” These workers have a say in how the money is managed by virtue of their trade union membership. The largest client of the PIC is the Government Employee Pension Fund Scheme (GEPFS) with assets of R786 billion being managed by the PIC [3]. The GEPFS consists of 325 government departments and roughly 400 000 state pensioners.

 

An Institutional Investor

When discussing shareholdings in public companies it is important to remember that ownership in most listed companies is concentrated in the hands of Institutional Investors rather than individual shareholders. Institutional Investors are largely investment managers, banks, hedge funds, insurance companies. The PIC falls within this pool of Institutional Investors. If the company disagrees with the goals of the Institutional Investor, the investor usually pursues the Warren Buffet approach and sell off which puts pressure on the share price (Supply/demand). Generally, Institutional Investors try to follow the CRISA codes when dealing with conflicts of interest [6], however, the PIC approach to social goals is much more enduring and aggressive.

How does the PIC pursue developmental goals?

For example, in December 2016, the PIC announced its deal to acquire a 26.4% stake in Distell (with Remgro [the Ruperts] currently holding around 50%). Interestingly, Remgro held a pre-emptive right on Distell shares, meaning the PIC overpaid for its shareholding by outbidding Remgro [2]. This is perhaps a perfect example of its dual mandate. The PIC is taking on traditionally white monopolies, possibly to the slight financial risk of its clients.

In 2015, the PIC communicated to management its strong disapproval of a golden handshake given to its former CEO who resigned after the Nigerian fine ($5.2 billion). He was paid out for the remaining three years of his basic salary, amounting to a cool R23.7m. This is an example of soft shareholder activism, whereby the PIC as shareholders expose maladministration and wasteful expenditure in companies.

Does the PIC achieve developmental goals within its own entity?

Screen Shot 2017-04-09 at 12.44.25 PM

 

This amounts to approx. 60% of PIC funds – which is not quite good enough for a state-owned entity. 

The PIC’s weight on the JSE and Property

According to the PIC website, the PIC is the largest institutional investor in South African equities, with investments contributing towards approximately 12.5% of the market capitalisation of the JSE and it currently holds 5% in offshore equities. In the property portfolio, there are a number of companies in which PIC Properties invests in, these include the V&A Waterfront and other companies owning major malls such as the Pavillion and Tygerberg.

If one looks at the JSE holistically, recent stats illustrate foreign investment is near 50% of the JSE [4]. This figure starts to make practical sense when 65% of the JSE’s Top 40 earnings comes from foreign currency [5]. Therefore, when looking from a South African Investor perspective, the PIC is accountable for roughly 25% of the South African investment in the JSE. 

[1] http://www.pic.gov.za/wp-content/uploads/2012/04/PIC-Integrated-Annual-Report-2016.pdf

[2] http://www.iol.co.za/business-report/companies/pic-becomes-shareholder-in-distell-7215613

[3] LEKHESA M, “SHAREHOLDER ACTIVISM: THE BIRTH OF A NEW PHENOMENON IN SOUTH AFRICAN CORPORATE LAW” LL.M Thesis 2009.

[4] https://www.moneyweb.co.za/investing/equities/how-foreign-equity-ownership-has-changed/

[5]. http://www.fin24.com/BizNews/just-how-local-is-jse-collocott-examines-foreign-earnings-as-of-total-earnings-20160524

[6] http://www.iodsa.co.za/?crisasummary

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