Ep 133: Inside Africa’s Largest Pension Fund Custody Mandate - Hazel Khumalo

Michael Avery (0:00)

Welcome to The Monocle Banking Podcast, curated by Monocle Solutions. Now, there's an old temptation when talking about pension funds to focus almost entirely on the people choosing the investment. Which shares are they buying? How much in bonds, infrastructure, private equity, offshore? But behind every one of those decisions sits another financial architecture that receives considerably less attention until something goes wrong, of course. Who actually holds the assets? Who independently records what the funder owns? And who makes sure the cash moved where it was supposed to move and that the security actually arrived? So that's the world of custody and it's becoming considerably more complicated. This week, we find out why and why Africa's largest pension fund chose Absa.

Well, African pension funds are getting bigger, and that is great news for the continent and its development. They're diversifying across borders and into private markets and into things like infrastructure and property and alternative assets. And they're being asked to think about climate risk, transformation and sustainable development. Regulators want more data, trustees want greater transparency, and members quite reasonably want to know that somebody is watching the people watching their money. South Africa offers a fascinating case study. The Government Employees Pension Fund is one of the largest pension funds in the world, and the largest on the African continent.

And it is the most consequential pool of capital on the continents. Its assets are managed predominately by the Public Investment Corporation, which is an institution whose own governance history has reminded us sometimes rather painfully why checks and balances and independent oversight matter. And now Absa has been appointed the GEPF's master custodian. So at first glance, it just sounds like a very large banking administration contract. But I think there's a much more interesting question here. Is the modern custodian becoming part of the governance architecture of institutional investing itself? Because once pension portfolios stretch across countries and currencies and public and private markets, increasingly we're seeing that it's not merely just about keeping the assets safe. It's about needing data and reconciliation and transparency and oversight, and increasingly perhaps an independent source of truth. So joining me to unpack all of that is Hazel Khumalo, head of Pan African Sales Investor Services at Absa Corporate Investment Bank.

Hazel, welcome to The Monocle Banking Podcast. Hope you're well.

Hazel Khumalo (2:37)

Thank you very much, Michael. I am. I hope you are too. And thank you for inviting me to this conversation.

Michael Avery (2:42)

I certainly am. And as I said to you earlier today, we are recording this on a Monday following another resounding Springbok victory. So I think all of us as South Africans are still basking in that afterglow a little bit. Let's Hazel strip away a bit of the jargon first, if you will. If I'm a GEPF member, if I'm listening to this, what exactly does Absa now do with my pension assets as Master Custodian?

Hazel Khumalo (3:05)

Thank you very much for asking that question. Maybe let me go back to the basics in terms of explaining what a Master Custodian does. In the olden days, potentially you would go and buy a share and you would receive your share certificate, which you would take home and potentially put it in the bottom of your drawer. Life has moved along since then.

The safeguarding of share certificates, for example, is more digital now. And if you're a corporate, you would actually rely on a custodian to assist you with the safeguarding and managing of your financial assets. What that requires a custodian to be able to do are four main things, Michael. The first one is the safekeeping and administration of those financial assets, such as equities, bonds and other money market instruments. A custodian would hold them securely to ensure that they do not get lost, or mishandled or indeed stolen. So that's the first big role that a custodian does, safekeeping and administration of those assets.

The second thing would be the settlement of trades themselves, ensuring that trades settle correctly, that the correct securities and payments are exchanged, that indeed the buyer receives the share that they have bought and the seller receives the money linked to that share. The third thing would be corporate action management. A custodian would be expected to handle events related to dividends, interest payments, stock splits and proxy voting on behalf of the asset owner. And then lastly, and I think you alluded to this, is record keeping and reporting. A custodian would maintain accurate records of all holdings and transactions and indeed provide regular reporting to clients. I think it is incredibly important to mention that a custodian does not make investment decisions. Your asset manager would still make those investment decisions regarding what to buy, where to buy and how much to pay for that. A custodian comes in post that in order to provide the safekeeping and administration of those investment assets as I have explained. In its simplest, the role of a master custodian specifically to the GEPF is to provide the institutional infrastructure that supports the safekeeping and administration of a fund's investment assets.