Public Investment Commissioners1 PRESENTATION TO PORTFOLIO COMMITTEE ON FINANCE Public Investment Commissioners 27 June 2003.

Public Investment Commissioners 1

PRESENTATION TO PORTFOLIO COMMITTEE ON

FINANCE

Public Investment Commissioners27 June 2003


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


FAIR VALUE OF PORTFOLIO


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


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


ASSET ALLOCATION


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


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%


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


INVESTMENT PERFORMANCE


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%


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


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


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 **


RESPONSES TO ISSUES

RAISED BY THE OFFICE OF

THE AG


AUDIT OPINION

THE AG ISSUED AN

UNQUALIFIED

AUDIT OPINION FOR THE

OPERATIONS OF THE PIC


AUDIT OPINIONAssets managed on behalf of other parties

QUALIFICATIONS

• Financial risk management

• Movement of funds

• Bank reconciliation

• Accounting practice


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


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.


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


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



EMPHASIS OF MATTER (Affecting Financial Statements)

• Accounting for structured investment products

• Ownership of some properties could not be confirmed


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


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



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


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


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.


Non-compliance with the PFMA

• The main reasons for this reporting matter were;

Late submission of financial statementsLate tabling of annual report


PLANS GOING FORWARD


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


THANK YOU

Public Investment Commissioners1 PRESENTATION TO PORTFOLIO COMMITTEE ON FINANCE Public Investment Commissioners 27 June 2003.

Documents

investment policies

specific asset allocation

money market14

totalrbnsheet1rand value

money market12

money market25

money market17

cap market55