THE RELATIVE INVESTMENT PERFORMANCE OF THE COMMUNITY GROWTH FUND Anthony Asher APRA 4 July 2005

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

History and structure of the Community Growth Fund

Structure Unity Inc. (7 black unions) Asset manager (Old Mutual Group) Community Growth Fund Management Company Community Growth Fund Other unit trusts

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

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

Social Criteria before 1996

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

Comparison with SRI criteria Criteria –Social –Political Screening –Prohibition –Ranking Investor activism –Private –Public

Possible reasons for differences in the performance of company share prices

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

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

Company profitability Sector Market niche Financial structure Technology People and institutions Perceptions

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

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

Statistically significant differences in investment returns

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

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

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%

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