PRESENTATION TO
PORTFOLIO COMMITTEE ON
FINANCE
Public Investment Commissioners
27 June 2003
Public Investment Commissioners
1
CONTENTS
1. Fair Value of Portfolio
2. Asset Allocation
3. Investment Performance 1999-2002
4. Issues raised by the Office of the Auditor-
General
5. Plans going forward
Public Investment Commissioners
2
FAIR VALUE OF PORTFOLIO
Public Investment Commissioners
3
Fair Value of Portfolio
R' Billion
31-Mar-99
31-Mar-00
31-Mar-01
31-Mar-02
Capital Market
98.00
110.80
125.00
136.60
Equities
39.10
61.50
81.90
105.80
Money Market
25.20
29.20
25.40
22.50
Property
1.00
1.00
1.00
1.20
Other *
13.80
19.10
19.80
26.30
TOTAL
177.10
221.60
253.10
292.40
* Includes Structured Investment Products, Investment Policies and the Isibaya Fund
Public Investment Commissioners
4
Rand Value of Portfolio
R'bn
300.00
250.00
200.00
150.00
100.00
50.00
0.00
1999
Capital Market
Equities
2000
2001
Money Market
Property
Public Investment Commissioners
2002
Other *
TOTAL
5
ASSET ALLOCATION
Public Investment Commissioners
6
Asset allocation methodology
• Asset allocation ranges are provided to the PIC by its clients
• Asset allocations are based on liability profiles, risk and return
requirements and liquidity needs of the clients
• Tactical asset allocation, i.e. specific asset allocation over the
short to medium term is informed by prevailing market
conditions and forecasts for individual asset classes
• The asset allocation is influenced by the magnitude of new
cashflows and is not adjusted instantaneously as investments
are made in such a way that market impact is minimised
Public Investment Commissioners
7
Asset Allocation 1999 - 2002
31-Mar-99 31-Mar-00 31-Mar-01 31-Mar-02
Capital Market
55.34% 50.01% 49.38% 46.71%
Equities
22.06% 27.74% 32.36% 36.20%
Money Market
14.22% 13.17% 10.03%
7.69%
Property
0.58%
0.48%
0.41%
0.41%
Other
7.80%
8.60%
7.82%
8.99%
Total
100.00% 100.00% 100.00% 100.00%
Public Investment Commissioners
8
Asset Allocation 1999-2002
60.00%
Capital Market
50.00%
Equities
40.00%
Money Market
30.00%
Property
20.00%
Other
10.00%
0.00%
1999
2000
2001
Public Investment Commissioners
2002
9
INVESTMENT PERFORMANCE
Public Investment Commissioners
10
Performance Per Asset Class 1999 - 2002
Capital Market
Equities
Money Market
Property
Other
Total
31-Mar-99
6.69%
-14.74%
17.04%
11.78%
0.38%
2.87%
31-Mar-00
20.40%
28.20%
13.60%
14.80%
4.20%
20.60%
Public Investment Commissioners
31-Mar-01
23.50%
3.30%
10.80%
12.40%
12.80%
13.40%
31-Mar-02
7.70%
27.50%
10.20%
12.20%
23.80%
16.20%
11
Performance per asset class for the four year
period ended 31 March 2002
100%
Other
80%
Property
60%
40%
Money
Market
20%
Equities
0%
Capital
Market
-20%
-40%
1999
2000
2001
Public Investment Commissioners
2002
12
Annualised return per asset class for the
4-year period ended 31 March 2002
16
14
12
10
8
6
4
2
0
Capital Market
Equities
Money Market
Public Investment Commissioners
Property
Other
13
PIC’s performance relative to the
median return - AFLMW
PIC
AFLMW **
Outperformance
1-Year 3-Year 5-Year
6.18 * 11.85 11.66
-11.75
5.65
7.91
17.93
6.2
3.75
* Figures not audited
** Source: Alexander Forbes Large Manager Watch
15
10
5
PIC
0
AFLMW **
-5
-10
-15
1-Year
3-Year
5-Year
Public Investment Commissioners
14
RESPONSES TO ISSUES
RAISED BY THE OFFICE OF
THE AG
Public Investment Commissioners
15
AUDIT OPINION
THE AG ISSUED AN
UNQUALIFIED
AUDIT OPINION FOR THE
OPERATIONS OF THE PIC
Public Investment Commissioners
16
AUDIT OPINION
Assets managed on behalf of other parties
QUALIFICATIONS
• Financial risk management
• Movement of funds
• Bank reconciliation
• Accounting practice
Public Investment Commissioners
17
Financial Risk Management
• The PIC has since adopted a comprehensive risk
management framework and policies
• Limitations in the current personnel structure
prevents the PIC from implementing this
framework
• The PIC has commenced with the process of
appointing risk management personnel
Public Investment Commissioners
18
Movements of funds
• There was not sufficient detail in the recording
of transactions in the general ledger due to
systems interface problems.
• The matter has since been resolved.
• All the transactions affecting funds under
management have been accounted for.
Public Investment Commissioners
19
Bank Reconciliation
• Changes in accounting processes resulted in system
related problems that had a negative impact on the
quality and validity of bank reconcilliations
• The Commissioners requested a forensic audit of the
bank reconciliations to resolve this matter
• A preliminary report of the forensic audit has ruled
out any irregularities
Public Investment Commissioners
20
Accounting Practices
• The presentation of financial statements was not in
line with GAAP
• Accounting for investments in associates was not in
line with GAAP
• Changes in foreign exchange rates not in line with
GAAP
• The presentation of investments in properties not in
line with GAAP
• Discussions with the AG on compliance with GAAP
are continuing
Public Investment Commissioners
21
AUDIT OPINION
Assets managed on behalf of other parties
EMPHASIS OF MATTER (Affecting Financial Statements)
• Accounting for structured investment products
• Ownership of some properties could not be confirmed
Public Investment Commissioners
22
Accounting for Structured Investment Products
• These are often very complex structured
products for which there is usually no
consensus on treatment in the accounting
profession
• As reported by the Auditor-General, controls
and accounting improved during the latter part
of the year
Public Investment Commissioners
23
Ownership of some properties could
not be confirmed
• These are properties purchased and paid for by
the former Bop and Transkei pension funds
and for which transfer of ownership never took
place
• Lawyers have been instructed to resolve this
matter
Public Investment Commissioners
24
AUDIT OPINION
Assets managed on behalf of other parties
EMPHASIS OF MATTER (Not Affecting Financial
Statements)
• Weaknesses in internal control
• Possible restructuring
• Inadequate client reporting
• Delayed tabling of the previous year’s annual report
• Non Compliance with the PFMA
Public Investment Commissioners
25
Weaknesses in Internal Control
• This refers to two aspects, viz;
 Lack of a formal risk management system; and
 No internal audit function
• Both these matters are being addressed with the
recruitment of staff
Public Investment Commissioners
26
Inadequate Client Reporting
• This issue is only relevant to our largest client, the
Government Employees Pension Fund
• It is due to the fact that information regarding the
performance of structured investments and the
outsourced portion of the PIC’s equity portfolio is
only available once the relevant client reports are
received from the relevant third parties.
• As from 1 April 2002 this matter has been resolved.
Public Investment Commissioners
27
Non-compliance with the PFMA
• The main reasons for this reporting matter
were;
Late submission of financial statements
Late tabling of annual report
Public Investment Commissioners
28
PLANS GOING FORWARD
Public Investment Commissioners
29
Strategic Plans
• Organisational Structure is being reviewed
• Implementation of risk management
framework and policies
• Tactical asset allocation models to be reviewed
• Refinement of strategy for investments
through the Isibaya Fund
Public Investment Commissioners
30
THANK YOU
Public Investment Commissioners
31