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Changes in foreign exchange rates on our non- Uganda Shillings investments have a substantial impact on short-term investment performance expressed in Uganda Shillings. The exchange rate loss in the fiscal year was UGX 13.63Bn compared to UGX 302.22Bn last year—a massive recovery. Some investors manage this risk with currency hedging, which reduces the shorter-term impact of foreign exchange rate changes on their returns. Hedging carries a significant execution cost, however, and requires setting aside cash or at times generating it quickly to meet currency hedging contract obligations. In addition to its cost, we believe extensive hedging of foreign investments is not appropriate for the Fund for the following reasons:
Changes in foreign exchange rates on our non- Uganda Shillings investments have a substantial impact on short-term investment performance expressed in Uganda Shillings. The exchange rate loss in the fiscal year was UGX 13.63Bn compared to UGX 302.22Bn last year—a massive recovery. Some investors manage this risk with currency hedging, which reduces the shorter-term impact of foreign exchange rate changes on their returns. Hedging carries a significant execution cost, however, and requires setting aside cash or at times generating it quickly to meet currency hedging contract obligations. In addition to its cost, we believe extensive hedging of foreign investments is not appropriate for the Fund for the following reasons:
During this fiscal year, we conducted an asset allocation and investment strategy review, focusing on our comparative advantages, and eliminating costly fees. This reinforces our stance on in-house asset management. Keeping the bulk of the assets under internal management saves the Fund over UGX 27Bn (it could be more) a year in fees.
Internal management is less than a third of that cost. We believe that the Fund`s respected brand allows us to attract, motivate and retain high-calibre investment professionals and operational specialists. It also helps differentiate the organisation in hotly contested markets for select investments.
Our investment programme is designed to capture regional growth while also demonstrating resilience during periods of market uncertainty. Our team of professionals corroborate information from across the region to apply their deep expertise and local knowledge to source investment opportunities, engage with world-class partners and build value in our existing assets.
Not many schemes have real estate and alternative investments as an asset class because of their inherent risks. We believe that over the years, despite legacy issues, we have built the capacity to turn this into a distinct opportunity and advantage for the Fund going forward.
We believe in a long-term investment approach. The investment team has the scale to engage in almost every capital market and investment opportunity in the East African region. The unique characteristics of the Fund, together with the circumstances that we can benefit from or control, drive our investment strategy.
The Fund manages an investment portfolio to meet its current and future obligations over the long term, including paying benefits in a timely fashion, generating real long-term annualised returns, and minimising the likelihood of a substantial, sustained drawdown of its assets. Consequently, we can withstand short-term downturns to create value over the long run.
During this fiscal year, we conducted an asset allocation and investment strategy review, focusing on our comparative advantages, and eliminating costly fees. This reinforces our stance on in-house asset management. Keeping the bulk of the assets under internal management saves the Fund over UGX 27Bn (it could be more) a year in fees.
Internal management is less than a third of that cost. We believe that the Fund`s respected brand allows us to attract, motivate and retain high-calibre investment professionals and operational specialists. It also helps differentiate the organisation in hotly contested markets for select investments.
Our investment programme is designed to capture regional growth while also demonstrating resilience during periods of market uncertainty. Our team of professionals corroborate information from across the region to apply their deep expertise and local knowledge to source investment opportunities, engage with world-class partners and build value in our existing assets.
Not many schemes have real estate and alternative investments as an asset class because of their inherent risks. We believe that over the years, despite legacy issues, we have built the capacity to turn this into a distinct opportunity and advantage for the Fund going forward.
We believe in a long-term investment approach. The investment team has the scale to engage in almost every capital market and investment opportunity in the East African region. The unique characteristics of the Fund, together with the circumstances that we can benefit from or control, drive our investment strategy.
The Fund manages an investment portfolio to meet its current and future obligations over the long term, including paying benefits in a timely fashion, generating real long-term annualised returns, and minimising the likelihood of a substantial, sustained drawdown of its assets. Consequently, we can withstand short-term downturns to create value over the long run.
The progress made since the last fiscal year is summarised in Table 3 below:
| No. | Item | Progress |
|---|---|---|
|
(a) |
Reducing the allocation to fixed income to 70% of the investment portfolio. |
This target weight was revised upwards to 75% after the review of the Strategic Asset Allocation (SAA) following the changes in the NSSF Act. It remains largely a work in progress as most of the opportunities to absorb the kind of liquidity of a scheme of our size tend to exist in the fixed-income asset class. Nevertheless, we managed to keep the allocation flat at 78%. |
|
(b) |
Increasing the allocation to equities to 22.5% of the investment portfolio. This will include listed and private equity. |
This target weight was revised downwards to 17.5% after the review of the SAA following the changes in the NSSF Act. In the fiscal year, we managed to keep the allocation flat at 15% through some secondary market opportunities. |
|
(c) |
Maintaining the allocation to real estate at 7.5% of the investment portfolio. This will include investing in build and sell projects, commercial and mixed-use properties, and land banking. |
This target weight remained the same at 7.5% after the review of the SAA following the changes in the NSSF Act. This was largely achieved. We closed at 7.4%. The Mbuya Citadel is now fully sold out. |
|
(d) |
Unlocking the value of real estate land by coming up with concepts to have it developed. |
Construction works are ongoing in Temangalo and Mbale. Progress was also made on the Pension Towers and Lubowa projects. There were delays in acquiring land in Gulu and completing the procurement of a design and build contractor for Yusuf Lule Road. |
|
(e) |
Diversifying by country (within the investment universe), asset class, sector, currency, and many other risk factors. |
This was largely achieved and is consistent with our strategic asset allocation. UGX 419Bn was deployed in equities. |
|
(f) |
Exploring new asset classes that improve the risk-return profile of the Fund and working with the regulator to have them cleared. |
We continue to engage the regulator and other partners on securities lending. |
The progress made since the last fiscal year is summarised in Table 3 below:
| No. | Item | Progress |
|---|---|---|
|
(a) |
Reducing the allocation to fixed income to 70% of the investment portfolio. |
This target weight was revised upwards to 75% after the review of the Strategic Asset Allocation (SAA) following the changes in the NSSF Act. It remains largely a work in progress as most of the opportunities to absorb the kind of liquidity of a scheme of our size tend to exist in the fixed-income asset class. Nevertheless, we managed to keep the allocation flat at 78%. |
|
(b) |
Increasing the allocation to equities to 22.5% of the investment portfolio. This will include listed and private equity. |
This target weight was revised downwards to 17.5% after the review of the SAA following the changes in the NSSF Act. In the fiscal year, we managed to keep the allocation flat at 15% through some secondary market opportunities. |
|
(c) |
Maintaining the allocation to real estate at 7.5% of the investment portfolio. This will include investing in build and sell projects, commercial and mixed-use properties, and land banking. |
This target weight remained the same at 7.5% after the review of the SAA following the changes in the NSSF Act. This was largely achieved. We closed at 7.4%. The Mbuya Citadel is now fully sold out. |
|
(d) |
Unlocking the value of real estate land by coming up with concepts to have it developed. |
Construction works are ongoing in Temangalo and Mbale. Progress was also made on the Pension Towers and Lubowa projects. There were delays in acquiring land in Gulu and completing the procurement of a design and build contractor for Yusuf Lule Road. |
|
(e) |
Diversifying by country (within the investment universe), asset class, sector, currency, and many other risk factors. |
This was largely achieved and is consistent with our strategic asset allocation. UGX 419Bn was deployed in equities. |
|
(f) |
Exploring new asset classes that improve the risk-return profile of the Fund and working with the regulator to have them cleared. |
We continue to engage the regulator and other partners on securities lending. |
The macroeconomic and market environment
We remain cautious about the macro environment. On average, we expect the economies of the countries we invest in to grow in the range of 3.5 to 5% with a high risk of inflation, within a range of 5% to 9%.
We expect the inflation in developed markets to stay elevated and quantitative tightening to be the theme up to 2024.
The gold price and several commodities are also likely to fall over the next eighteen months as US real yields rise, and investors intensify their selling of safe-haven assets.
In this current high-yield and mixed-growth environment, in both the developed markets and local markets largely driven by demand and supply of liquidity, we continue to execute on our strategy to achieve a double-digit return target, as these challenging times require innovation and an understanding of our structural advantages.
The impact of this on our investments will depend on how foreign investors react to all this considering that their ownership of GOU bonds stands at a double-digit percentage (around 10.4%)
The macroeconomic and market environment
We remain cautious about the macro environment. On average, we expect the economies of the countries we invest in to grow in the range of 3.5 to 5% with a high risk of inflation, within a range of 5% to 9%.
We expect the inflation in developed markets to stay elevated and quantitative tightening to be the theme up to 2024.
The gold price and several commodities are also likely to fall over the next eighteen months as US real yields rise, and investors intensify their selling of safe-haven assets.
In this current high-yield and mixed-growth environment, in both the developed markets and local markets largely driven by demand and supply of liquidity, we continue to execute on our strategy to achieve a double-digit return target, as these challenging times require innovation and an understanding of our structural advantages.
The impact of this on our investments will depend on how foreign investors react to all this considering that their ownership of GOU bonds stands at a double-digit percentage (around 10.4%)
Our investment management strategy focuses on achieving the following goals:
We will continue to employ a total portfolio investment framework designed to optimally achieve the above dual goals. We are committed to the Fund’s purpose and mission of achieving competitive returns that, over the long run, will empower members to achieve economic security and believe in saving as a way of life. We are also committed to the success and sustainability of our programmes.
Our mission remains the same: manage the Fund`s investment portfolio in a cost-effective, transparent, and risk-aware manner to generate returns that create value for members. We are confident that the combination of skilled and professional investment staff and a well-considered investment strategy, will enable the Fund to deliver strong performance over the long term.
Gerald Paul Kasaato, CFA
CHIEF INVESTMENT OFFICER
Our investment management strategy focuses on achieving the following goals:
We will continue to employ a total portfolio investment framework designed to optimally achieve the above dual goals. We are committed to the Fund’s purpose and mission of achieving competitive returns that, over the long run, will empower members to achieve economic security and believe in saving as a way of life. We are also committed to the success and sustainability of our programmes.
Our mission remains the same: manage the Fund`s investment portfolio in a cost-effective, transparent, and risk-aware manner to generate returns that create value for members. We are confident that the combination of skilled and professional investment staff and a well-considered investment strategy, will enable the Fund to deliver strong performance over the long term.
Gerald Paul Kasaato, CFA
CHIEF INVESTMENT OFFICER