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Public Investment Commissioners 1
PRESENTATION TO PORTFOLIO COMMITTEE ON
FINANCE
Public Investment Commissioners27 June 2003
Public Investment Commissioners 2
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 4
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 5
Rand Value of Portfolio
0.00
50.00
100.00
150.00
200.00
250.00
300.00R'bn
1999 2000 2001 2002
Capital Market Equities Money Market Property Other * TOTAL
Public Investment Commissioners 7
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 8
Asset Allocation 1999 - 2002
31-Mar-99 31-Mar-00 31-Mar-01 31-Mar-02Capital 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 9
Asset Allocation 1999-2002
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
1999 2000 2001 2002
Capital Market
Equities
Money Market
Property
Other
Public Investment Commissioners 11
Performance Per Asset Class 1999 - 2002
31-Mar-99 31-Mar-00 31-Mar-01 31-Mar-02Capital Market 6.69% 20.40% 23.50% 7.70%Equities -14.74% 28.20% 3.30% 27.50%Money Market 17.04% 13.60% 10.80% 10.20%Property 11.78% 14.80% 12.40% 12.20%Other 0.38% 4.20% 12.80% 23.80%Total 2.87% 20.60% 13.40% 16.20%
Public Investment Commissioners 12
Performance per asset class for the four year period ended 31 March 2002
-40%
-20%
0%
20%
40%
60%
80%
100%
1999 2000 2001 2002
Other
Property
MoneyMarket
Equities
CapitalMarket
Public Investment Commissioners 13
Annualised return per asset class for the4-year period ended 31 March 2002
0
2
4
6
8
10
12
14
16
Capital Market Equities Money Market Property Other
Public Investment Commissioners 14
PIC’s performance relative to themedian return - AFLMW
1-Year 3-Year 5-YearPIC 6.18 * 11.85 11.66AFLMW ** -11.75 5.65 7.91Outperformance 17.93 6.2 3.75
* Figures not audited** Source: Alexander Forbes Large Manager Watch
-15
-10
-5
0
5
10
15
1-Year 3-Year 5-Year
PIC
AFLMW **
Public Investment Commissioners 16
AUDIT OPINION
THE AG ISSUED AN
UNQUALIFIED
AUDIT OPINION FOR THE
OPERATIONS OF THE PIC
Public Investment Commissioners 17
AUDIT OPINIONAssets managed on behalf of other parties
QUALIFICATIONS
• Financial risk management
• Movement of funds
• Bank reconciliation
• Accounting practice
Public Investment Commissioners 18
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 19
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 20
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 21
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 22
AUDIT OPINIONAssets 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 23
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 24
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 25
AUDIT OPINIONAssets 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 26
Weaknesses in Internal Control
• This refers to two aspects, viz;
Lack of a formal risk management system; andNo internal audit function
• Both these matters are being addressed with the recruitment of staff
Public Investment Commissioners 27
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 28
Non-compliance with the PFMA
• The main reasons for this reporting matter were;
Late submission of financial statementsLate tabling of annual report
Public Investment Commissioners 30
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