Environmental concerns, ethical considerations and a swath of corporate scandals have shifted socially responsible investment (SRI) into the mainstream in many countries. In SA, investment aimed at social upliftment and development has added another layer, prompting Alexander Forbes Asset Consultants to term the overall concept targeted development investment (TDI).
As an approach, SRI/TDI has yet to gain the acceptance in SA it has in many other countries. Though not fully representative, total assets of R13,85bn spread over the 15 funds in the Alexander Forbes' TDI manager watch survey are a fair reflection of the market's size, says Godfrey Albertyn, a fund manager at Metropolitan Asset Managers.
This indicates that market share of SRI/TDI funds is less than 1% of total assets under management in SA. By comparison, SRI assets in the US total more than US$2 trillion, or about 11% of all assets under management, according to the US Social Investment Forum.
WHAT IT MEANS
 SRI/TDI yet to gain wide acceptance in SA
Private investors worry about returns
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Mark Davids, an analyst with Alexander Forbes, agrees, though he feels SRI/TDI is gaining some traction in SA.
Both Albertyn and Davids believe another inhibiting factor is the perception that TDI does not deliver satisfactory, consistent returns. "Studies abroad show they do," says Davids.
Performance of TDI funds in SA bears out this contention. In the equity fund group - the largest housing 40% (R5,5bn) of total TDI assets - two unit trusts, Fraters Earth Equity (FEE) and Futuregrowth Albaraka Fund, have produced particularly strong returns.
Over three years to June 30, FEE's total return of 188,73% was well ahead of the unit trust equity general sector's 169,76% mean and placed it fifth out of 40 funds. Over one year a 50,45% return (sector 43,36%) earned it seventh position out of 51 funds.
FEE was launched in 2001 and was the first fund in SA to apply the SRI concept of active engagement with the companies in which it invests. All funds in Frater Asset Management's stable now apply this approach with the firm's overall value style.
"We engage in discussions with the companies in which we invest," says FEE manager Terrance Craig. Some of the aspects covered include exercising voting rights with an eye to ensuring that a company is run in its shareholders' best interests and confronting companies where issues such as governance and social and environmental management are found wanting.
FEE is also the core component of the top-performing fund in the balanced TDI sector over 12 months, Momentum Supernation Fund. As at June 30, FEE had a 68,5% weighting in the fund.
Fraters also played a key role in the Futuregrowth Albaraka Fund's (FAF) success. Managed by Fraters between 2000 and early-2005, FAF - which complies with Islamic Shariah law - was the top-performing equity fund in the TDI survey over five years, delivering a 267,7% total return.
FAF has been managed in-house by Futuregrowth's Ashraf Mohamed since March 2005 and remains among the equity general sector's leaders, with a 49,04% return placing it 13th over 12 months. This is despite FAF being run on what Mohamed says are "very orthodox" lines. He adds that FAF is getting good support from non-Muslims, who now account for 45% of total assets of R602m. "They appreciate the ethics and performance," he explains.
FAF applies a filtering approach, the second of two SRI methodologies. In FAF and other Shariah-compliant funds, such as Oasis Crescent Equity, the filtering approach excludes companies associated with unacceptable activities such as alcohol, gambling, non-Halal food and those who charge interest, such as banks. The filtering process can go further to include aspects such as acceptable limits on a company's debt level, interest income and accounts receivable.
A filtering approach and active engagement is used by the Community Growth Equity Fund (CGE) managed by Old Mutual Asset Management (OMAM) in a joint venture with Unity, a coalition of seven trade unions. Trade union money makes up almost all CGE's total R2,2bn assets, says Douglas Davis, who has managed the fund for about 12 months. From the filtering process a short-list of buying possibilities is compiled for review by the trade unions, explains Davis. Aspects such as job creation, corporate governance, relations with unions and environmental issues play key roles in the filtering and engagement processes.
But CGE's returns have not been as impressive as some of its SRI domestic equity peers and have lagged behind the equity general sector mean over three years and one year, though not by a big margin. However, in the fixed-interest sector TDI comes more into its own. With R4,98bn housed in three funds, it is also the second-largest sector, representing 36% of total SRI assets in the survey.
Sector heavyweight Futuregrowth Infrastructure Bond Fund (FIBF), which has total assets of R3,53bn, has also shown that socially aware investment need not come at the expense of performance.
FIBF, a pooled fund targeting institutional investors, delivered better returns than the benchmark Bond Exchange of SA's all bond index (Albi) over all key periods over the past five years.
In the five years to June 30 FIBF produced a total return of 81,09% compared with the Albi's 75,29%. Over three year's FIBF's 34,67% return (Albi 31,94%) would have placed it second out of 17 funds in the domestic unit trust bond sector and ahead of the latter's 30,65% mean return. Over one year FIBF's 5,93% return (Albi 3,94%) exceeded the best-performing bond unit trust's 5,16% return.
"It proves that infrastructure bonds as a yield-enhancing class can deliver superior and sustainable long-term returns," says Futuregrowth director Andrew Canter.
FIBF's portfolio is aligned with investments targeted by government's broad-based black economic empowerment (BEE) strategy.
Regrettably, says Canter, new infrastructure bond issues are few and far between, despite bold public-sector spending plans. Issues tend to be privately placed and are snapped up by banks.
Arguably the most distinct TDI fund in Alexander Forbes' survey is the sole representative of the alternative assets sector - OMAM's pooled Infrastructural, Developmental & Environmental Assets fund (Ideas). The R1,3bn fund is akin to a private-equity investment vehicle, says manager Jurie Swart.
Ideas focuses on project finance deals in the infrastructure development sector, with no big exposure to any one deal. Echoing Canter, he says deal flow in the infrastructure sector is "surprisingly slow". Ideas is, however, not limited to project finance and will also look at infrastructure bonds and property, says Swart.
Ideas' targeted return is consumer price inflation plus 7%/year over a three-year rolling period - a tough objective, but one it has comfortably exceeded over one, three and five years.
For now the only entry point in SRI property is the Futuregrowth Community Property Fund (FGCP). Now in its 10th year, FGCP has a R542m portfolio, comprising 16 shopping centres in semirural areas and townships in eight provinces.
Over the past three years, FGCP produced a total return of 63,1% compared with a 119,4% mean from domestic flexible property funds. The two are not comparable, says FGCP manager Wayne van der Vent. He explains that FGCP's returns are primarily based on rental income and take little notice of capital appreciation. This makes FGCP a stable long-term growth proposition because of its resilience to any sharp rise in interest rates or slump in investor sentiment.
Metropolitan African Wealth Creator (MAWC), an R871m asset pooled fund in the balanced sector, is also heading down the private-equity route. MAWC's mandate is to finance BEE deals, primarily by way of unlisted vehicles, says Albertyn.
To date, MAWC's returns (82,4% over three years) have been primarily generated by listed equity holdings, long dominated by MTN.
Private equity has a strong following because it is considered a way to gain increased portfolio diversification - this could make MAWC an attractive vehicle. However, Albertyn says so far MAWC has attracted only 20% of assets from outside the Metropolitan group.
Only time will tell whether SA institutional and private investors will accept SRI/TDI funds as mainstream investments.
