EPPFTransformation Breakfast

13 June 2019

The impact of and the outlook for EPPF Transformation Initiatives

Ndabezinhle MkhizeChief Investment Officer

1

Introduction and Scope1

2

Introduction and Scope

• Earlier presentations have focused on the journey of the Fund within the context of transforming the

investment industry since 2012:

• This section will delve into the detail of the impact of and the outlook for EPPF transformation

initiatives:

• The impact of the public markets (listed) manager incubation programme

• The establishment of the private markets (unlisted) manager incubation programme

• The exploration of the emerging manager programme for global mandates.

• The integration of transformation, ESG, and the Real Assets in the quest for superior long-term

investment returns.

• However, it is proper to begin with a brief look at the financial health of EPPF as measured by its

funding ratio

3

Funding Ratio and

Management Actions2

4

Assets Under Management

30 June

2016

30 June

201811 June

2019

R 129.8bn

R 140.6bn

R 147.8bn

30 June

2017

R 132.6bn

The financial health of the Fund

The Fund continued to grow the assets under management not

withstanding the volatility in global and local capital markets

5

110%

120%

110%

106%

118%

113%

95%

100%

105%

110%

115%

120%

125%

2013 2014 2015 2016 2017 2018

The ratio of assets to all liabilities (including contingency reserves)

is know as the funding ratio. EPPF’s funding ratio is one of the

healthiest in South Africa and worldwide.

The EPPF Funding Ratio

This level represents one of the best funding ratios compared to the DB pension funds of the world EPPF is the second-largest pension fund in South Africa

Strategic Asset Allocation

6

Investment-related management actions

• Shifting towards Real Assets (direct property and infrastructure assets) in order to

– Earn a positive and inflation-sensitive return that exceeds the target CPI+4.5% net of fees and taxes;

– Lower downside volatility of the overall portfolio;

– Enhance the stability and the predictability of investment returns; and

– Better match the duration of the funds assets to the liabilities.

• Strengthening our investment teams by attracting and retaining high-calibre staff across the three segments of the Investment Management Unit (IMU)

– Investment Multi-Management team

– Private Markets team

– In-house Asset Manager

• Reviewing the long-term performance of our asset managers to take corrective action where necessary

• Using a appropriate downside protective strategies as the markets recover

– Hedging (e.g. zero-cost short fences)

– Equity Linked Notes

• Diversified exposure to offshore equities – Added China-A equities to DM and EM equities 7

Risk budgeting framework

• Implemented a robust risk budgeting framework in 2014

• Allows the Fund to go beyond asset allocation and embrace the allocation of risks

• Gives the Board the ability to identify and monitor the risks it wants to take.

• Consequently, it gives the Fund latitude to embrace riskier activities like manager incubation programmes

• Allows the Fund to monitor and rebalance exposure to various risk factors (and styles); and

• Has increased our ability to allocate to Real Assets with more conviction.

8

EPPF Manager

Incubation Programmes3

9

The Manager Incubation

Programme in Public Markets

10

Employment Creation: Incubation Managers

2

3

5

5

2

9

11

12

Cachalia

Legacy

Excelsia

Benguela

Number of staff

31-May-19 Inception into EPPF

Recently approved for graduation

11

Employment Creation: Graduated Managers

4

4

7

4

2

10

9

27

10

30

Meago

FirstAvenue

Perpetua

Mianzo

Mazi

Number of staff

31-May-19 Inception into EPPF

12

AUM and Clients: Incubated Managers

13

AUM and Clients: Graduated Managers

14

Long-term investment

performance of these managers

15

3 Year Rolling Alpha – Domestic Equity

16

5 Year Rolling Alpha – Domestic Equity

17

7 Year Rolling Alpha – Domestic Equity

18

Success of incubation programme

• Performance of graduated managers

• Number of managers who have grown in size, since EPPF

allocated them funds.

• Creation of jobs and growing the number of investment

professionals … and Black CIOs

• Increased business stability and institutionalisation of

governance and investment processes

• However,

19

The Manager Incubation

Programme in Private Markets

20

The case for a Private Markets incubation programme

• The Fund seeks to establish a Private Markets Incubation Mandate, inter alia, for the following reasons:

• To create and/or support start-up Black asset managers in the private markets investment arena in manner that:

• Operates within a wider risk budget;

• Employs the resources and the intellectual capital of an experienced private markets operator/incubator in

order to mitigate the risk of this programme; and

• Imposes no inordinate constraints on the (time) resources of the EPPF internal private markets team.

• To meet the other objectives of investments in Private Equity, Real Assets, and Development Impact

investments. For example, to obtain:

• Attractive risk-adjusted returns relative to listed equities;

• Improve the matching of EPPF assets with the liability profile of the Fund

• Earn a stable and predictable cash yield; and

• Obtain long-term protection against inflation.

21

Private Markets – Incubation Programme

R2bn Allocation

Focus is on first-time Black asset Managers with relevant experience, viable business models, and a preference for tangible pipeline

SA investment focus (African exposure capped at 30%)

Real Assets (60%) / Private Equity (40%)

22

The Real Assets Mandate

27 23

Private Markets – Incubation Programme

Asset Class

Private Equity / Private Debt

Infrastructure

Property

Up to R300m Ticket Size*

*EPPF willing to be the first LP to commit but success will be measured by the number of other LPs that join subsequently24

Manager of the Private Markets Incubation Programme

• Appointment (subject to some conditions precedent) of Thuso

Incubation Partners, a JV between KeNako Capital and its Black staff.

• Track record in incubating private market managers (real assets or

private equity)

• Ability to conduct thorough DDs on potential managers

(investments/compliance/operational DDs)

• Willingness to assist chosen managers to navigate the choppy waters

of being a start-up

• Back office platform or support

• Be a sounding board to the managers

• Commitment to BBBEE

25

Critical success factors - Incubation

FACTOR SUCCESS FAILURE

Access to capital for talented Black investment

professionals✓

Incubation structure allows team to focus on

investment decisions - Allows team to build a

track record

✓

Institutionalisation of Black businesses in the

asset class - Build and implement governance

processes✓

Incubated managers are sustainable enough to

raise subsequent funds from investors other

than EPPF✓

Incubated teams produce high, sustainable

returns from a defined, consistent investment

philosophy✓

26

Critical success factors - Incubation

FACTOR SUCCESS FAILURE

Recruit and retain high quality staff – Increase

number of Black professionals✓

Build skills across the value chain – Origination,

Structuring and Execution✓

Allocate EPPF pensioners’ capital to teams

lacking investment ability

Circumvent investment processes and

encourage lack of accountability

Tolerate unsatisfactory investment returns

27

The Global Listed Markets

Manager Incubation Programme

28

Global Markets Incubation

• Global assets outside of SA and Africa account for circa R44 billion (c.US$3 billion) of the Fund’s total assets

• There is a need, in accordance with the BBBEE Policy of the EPPF, to grow internationally Black asset

managers that have cut their teeth in South Africa to also manage offshore assets.

• There is some international evidence to suggest that emerging managers (i.e. with circa US$1bn to US$10bn)

are able to outperform larger managers.

• A great proportion of the Fund’s offshore portfolio management teams are located in London and Europe.

Exposure to North American and to Asia-based managers is likely to improve diversity across all dimensions

that are meaningful to the Fund.

• Management believe 10% of Global Developed Markets and Global Emerging Markets should be a

minimum starting size of this mandate.

• This means the initial size would be R4.4 billion (circa US$300 million), which would equate to 3% of the

Fund’s total assets

3229

ConclusionQ

30

Conclusion• The existing manager incubation programme (public markets) has been a tremendous success:

• The selected Black managers have been EPPF’s top performers over a long period of time

• The programme has made a real contribution to the transformation of the asset management

industry

• Large Black asset managers should not rest on their laurels but must invest in technology (read AI)

and in their brands in order to remain competitive.

• The incubation programme in private markets has now been established but it will only

succeed if other SA asset owners and asset consultants work collaboratively and do crowd-in

international asset owners.

• Integration of ESG into investment processes of all managers will become very important going

forward - and in SA transformation is viewed as forming a significant part of the ESG’s social factor.

• The global offshore allocation can easily account for 40% of the SAA of a pension fund and, going

forward, there will be fewer and fewer compelling reasons for leaving managers of these mandates

unperturbed by the clarion call towards ESG, diversity and transformation.31

Questions & AnswersQ

32