How to deal with the implications of New Regulation 28 Magda Wierzycka CEO SYGNIA ASSET MANAGEMENT

 New Regulation 28 became effective 1 July 2011 –Phase in period till 31 December 2011 – Additional draft notices: Derivatives, scrip lending, public entities Update  Requires active and ongoing decisions and actions from boards of trustees in respect to: – Rules: Asset managers can monitor rules compliance, but asset allocation limit changes necessitate a strategy review – Principles: Trustees need to implement, apply and demonstrate compliance to auditors and regulators

 Imposes compliance with Principles in addition to Rules : –Compliance with the spirit of the regulation –Promotion of education of trustees –Consideration of BEE when appointing service providers –Ensuring that assets are appropriate to the liabilities –Performance of appropriate due diligence (taking into account risk factors) when making investment decisions, particularly in foreign assets, derivatives and scrip lending –Consideration of environmental, social and governance factors when making investment decisions  Applicable at individual member level  Requires ability to “look through” to holding information  Lifts permissible International Exposure to 25% Hedge Fund/Private Equity Exposure to 15% and Commodity ETFs to 10%  Board of trustees retains responsibility for compliance Most Important Changes

How are you going to manage compliance with Regulation 28 at individual member level?  The easiest way is to unitise all the investments / investment channels so as to ensure members hold units rather than market values for ease of information management. What systems and procedures are you putting in place to be able to easily demonstrate compliance with Regulation 28 to auditors? How are you going to consolidate holdings and review those on a look-through basis?  The answer lies in technology and systems which allow for look-through and consolidation.  Once consolidation of holdings information is available ESG principles can be integrated in investment decision making. How are you going to assess counterparty risk in OTC, scrip lending and derivative transactions?  The look-through requirements, used in conjunction with a professional risk management framework, should address the issue. Investment mandates need to be clearly worded. Questions Trustees Need to Answer

 We believe that the wisest course of action is to outsource the functions to experts who will assume responsibility for risk evaluation and due diligences and make all the information available to trustees in an easily understandable manner e.g. library of information available to trustees via an internet based portal. Questions Trustees Need to Answer How are you going to demonstrate regular consideration of the appropriateness of assets to liabilities? How are you going to take ESG factors into account?  Detailed Asset Liability Modelling review performed at least annually  Regular and appropriate communication with members regarding their financial position How are you going to perform appropriate due diligence of your asset managers (including offshore ones) and the strategies that they employ so as to ensure that you have considered all the risks and ensured compliance with new Principles?  Ongoing quantitative and qualitative analysis of all asset management houses  Review of the Investment Policy Statement, Management Agreements and Mandates  Restructuring of report-back presentations e.g. focus on ESG factors in stock selection Do you want to assume full responsibility for performing the above functions or do you want to outsource that responsibility?

Do you and your members understand the benefits of taking environmental, social and governance factors into account when making investment decisions? Between equities, listed property, hedge funds, private equity funds and commodities, exposure to volatile asset classes can be lifted to 100% of a portfolio. Do you believe all your members should have 25% allocation to international assets?  This decision should not be a case of majority opinion. The correct allocation needs to take into account liabilities and be determined using ALM tools. Trustees can thus easily demonstrate how they arrived at the conclusion and link the decision to the risk profile of the liabilities. Do you wish to invest in Africa, hedge funds, private equity fund or ETFs?  The issues require an education strategy session before any decisions can be made. Questions Trustees Need to Answer  The issues require education / training and a member communication strategy.

To protect yourself, what tools are you going to use to arrive at a justifiable decision?  Before you tackle these questions, you need to ensure you understand the issues (education).  Where future is unknown, the only safe answer is a reference to quantitative probability analysis and an answer which at all costs must be seen as well-considered, documented and sensible. Questions You Need to Answer

Answer lies in technology and appropriate advice:  Systems which can consolidate data and make that information available to the board of trustees and auditors  Advice which ensures board of trustees can achieve compliance by 31 December 2011 Answer to Regulation 28 Compliance Boards of trustees need to assess the services to be provided by:  Investment consultants  Liability administrators  Investment administration platforms  Multi-managers  Asset managers

 Compliance with the new Regulation 28 will COST more money and effort  Compliance will not happen automatically as it requires active and ongoing decisions and actions from trustees  Compliance must start NOW – do not leave it till December to decide who needs to do what Recommendations

 Rewrite your IPS in line with Code for Responsible Investing in SA (CRISA)  Decide on the level of compliance: positive selection, activism through voting, consultative approach, inclusion in analysis or exclusion  Rewrite your management agreements and mandates with asset managers  Take a more active interest in proxy voting  Ask for regular feedback from asset managers and more meaningful reporting  Put systems and procedures in place to enable MONITORING and MEASUREMENT! EXAMPLE: What to do about ESG?