THE RELATIVE INVESTMENT PERFORMANCE OF THE COMMUNITY GROWTH FUND

1
THE RELATIVE INVESTMENT PERFORMANCEOF THE
COMMUNITY GROWTH FUND

• Anthony Asher
• APRA
• 4 July 2005

2
Outline

• History and structure of CGF
• Possible reasons for differences in share
  performance
• Statistically significant differences

3
History and structure of the Community Growth Fund
4
Structure
Asset manager (Old Mutual Group)
Unity Inc. (7 black unions)
Community Growth Fund Management Company
Community Growth Fund
Other unit trusts
5
A South African Timeline

• 1979 First legal black trade unions
• 1983 First jointly managed provident fund
• 1990 ANC unbanned, Mandela released
• 1992 COSATU rejects share investment
• CGF formed
• 1993 New Constitution protects property
• 1995 Free JCI call option black enrichment

6
The Investment Process

• Asset Manager proposes company
• LRS/HSRC investigates company and evaluates on
  social criteria
• Unity approves evaluation
• Rejections publicised
• Asset Manager invests in company
• Publicity to acceptable companies

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Social Criteria before 1996
8
Social Criteria after 1996
      Create jobs through innovation and expansion.
      Training of workers to enhance skills
      Economic and social empowerment
      Equity through affirmative action within the workplace
      Good conditions of employment
      Sound environmental practices must be promoted
      High health and safety standards must be applied
      Demonstrate open and effective corporate governance
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Comparison with SRI criteria

• Criteria
• Social
• Political
• Screening
• Prohibition
• Ranking
• Investor activism
• Private
• Public

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Possible reasons for differences in the
performance of company share prices
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Determinants of share prices
Demand by investors

Share prices
Supply by firms
Return on investment
Buyers, suppliers and perceptions of value
12
Demand and Supply

• Investors applying social criteria
• Directors applying social criteria
• Social, technical or economic changes
• Moral arbitrage if long term imbalances

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Company profitability

• Sector
• Market niche
• Financial structure
• Technology
• People and institutions
• Perceptions

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People and institutions

• Justice is the bond of society...
• is the condition under which I and every man can
  identify with society, feel at one with it, and
  accept its rulings as my own
• J R Lucas

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Fiduciary duties

• Accordingly, trustees of a pension fund could not
  refuse for social or political reasons to make a
  particular investment if to make that investment
  would be more beneficial to the beneficiaries of
  the fund.
• Megarry J

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Statistically significant differences in
investment returns
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Table 2 Outperformance of approved shares

• Sector
• Gold 63
• Industrial 31
• Engineering 26
• Hotels 10
• Performance relative to rejected shares in same
  sector in the five years to 31 December 1992
• Major criteria job creation, IR, employment
  conditions

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Table 3 Relative outperformance 1998 to 2001

• A rated 6
• accepted
• B rated -1
• pending further investigation
• C rated -2
• rejected
• Statistically significant only at 30 level

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Regression on all criteria

• All companies
• No criterion significant at 10 level
• Excluding black empowerment companies
• Affirmative action significant at 5 level
• Limiting outliers
• Job creation (negative) at 1
• Corporate governance at 1

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Conclusions

• Social criteria have different effects at
  different times
• Criteria that lead to internal justice may
  produce permanently greater returns