May 13, 2002
South African Fund Applies Socially Responsible Investing Principles
by William Baue
Fraters Earth Equity Fund promotes positive corporate governance by engaging with the South African
companies in which it invests.
In the 1980s and early 1990s, opposition to investment in South Africa crystallized the socially
responsible investing (SRI) movement, as the Apartheid regime represented an unquestionably
unethical social system. However, the economic influence that elicited this social change was
largely extra-national, as both the investors and the companies they divested from tended to reside
outside South Africa. In the intervening decade, SRI has carved a niche in South Africa's internal
financial community. In October 2001, Cape Town-based Frater Asset Management launched one of the
few South African SRI funds, Fraters Earth Equity Fund (EEF). EEF's investment universe is limited
to South African companies.
"Frater believes in SRI," said Terence Craig, Frater's
chief investment officer and EEF fund manager. "Fraters Earth Equity Fund is the first fund in
South Africa to promote corporate citizenship within the companies that it holds through an overlay
of constructive engagement and shareholder activism."
The EEF employs an overlay
approach, which refers to an investment strategy where financial objectives are overlayed with
social, environmental, and ethical objectives. With the overlay approach investors try to meet
social, environmental, and ethical objectives by actively engaging with companies rather than
screening them out from investment.
Frater says encouraging companies to adopt best
practice on social and environmental issues is more appropriate for the South African market. With
the fund's investment universe being limited to companies listed on the Johannesburg Securities
Exchange (JSE), applying screens is not a viable option.
"The JSE Index is weighted by
market capitalization and any meaningful screen of its larger constituents would distort the
risk/return profile of the investment universe to such an extent that it would be impossible to
replicate the index," said Mr. Craig. "The five largest companies on the JSE comprise around 40
percent of the index. Excluding one of these companies (for say tobacco) would distort the
investment universe too far away from the index--something that both institutional and retail
clients do not want."
Furthermore, by engaging with companies to improve their corporate
citizenship, Frater avoids the dilemmas of selecting screening criteria. Mr. Craig pointed out
that the criteria of certain international screened indices have been criticized as being overly
Frater focuses its engagement on three major issues: corporate governance
issues such as transparency; the HIV/AIDS crisis; and black economic empowerment.
relatively recent introduction of the EEF precludes one-year results. The fund has performed well
through its first six months; it is up about 16 percent in Rand terms. This increase has been
driven by the recovery of South African financial stocks as well as good stock picking in the
resources segment, particularly steel and gold shares, according to Mr. Craig.
As of the
closing of the JSE on May 8, the fund's top three holdings were Iscor (6.5% of fund), a South
African steel producer, BOE (6.4% of fund), South Africa's sixth largest bank, and Investec
Holdings (4.5% of fund), South Africa's fifth largest bank.
While Frater promotes
corporate transparency at its holdings, it also practices transparency itself by publishing its
proxy voting record on the EEF website. Frater will expand its transparency by publishing the
EEF's proxy voting policy in June. Frater is also considering expanding its investment outside of
South Africa, as the country's legislation allows for 15 percent of the fund to be invested
offshore. Toward this end, the firm seeks to identify a foreign asset manager whose investment
style and philosophy complements their own.