OUR PERFORMANCE:
CIO's Business Review
Investment beliefs
Foreign currency and hedging
As explained last year, 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 gain for the fiscal year ending 30 June 2024, was UGX 255Bn compared to a loss UGX 1.05Tn last year. 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.
The Fund’s investment strategy views currency risk as a potential source of incremental return.
We believe that extensive hedging of foreign investments is not appropriate for the Fund for the following reasons:
For a Ugandan investor, hedging foreign equity returns tends to increase, rather than reduce, overall return volatility. The Uganda Shilling tends to strengthen when global equity markets are rising and weaken when they are falling. This is partly due to the Uganda Shilling’s status as a commodity currency. Regional currencies tend to depict the same trend and are positively correlated with the Uganda Shilling. The extent of the differences is largely explained by demand and supply and openness of the respective country’s currency market, with Uganda’s market being the most open.
The cost of hedging currencies of many developing countries and frontier markets is high. If these countries continue to experience higher productivity and economic growth as their economies mature, their currencies should tend to strengthen over time. That would make a hedging programme a long-term drag on returns.
We mitigate the volatility of individual exchange rates by holding a broadly diversified set of currency, market timing for specific securities and country allocation.
In-house asset management
During this fiscal year, we reviewed our asset allocation and investment strategy to capitalise on our comparative advantages and eliminate costly fees, reinforcing our commitment to in-house asset management. By keeping the majority of assets under internal management, we save the Fund over UGX 36Bn annually in fees—potentially even more—as internal management costs are less than a third of that amount.
We believe our respected brand helps attract, motivate, and retain top investment professionals and operational specialists, differentiating us in competitive markets for select investments.
Our investment programme is designed to leverage regional growth and demonstrate resilience during market uncertainty. Our team uses their deep expertise and local knowledge to source investment opportunities, engage with world-class partners, and enhance the value of our existing assets. In-house asset management also helps differentiate the Fund in hotly contested markets for select investments.
Real estate and alternatives
Few schemes globally include real estate and alternative investments due to their inherent risks.
However, we believe that, despite legacy issues, we have developed the capacity to leverage these assets as a distinct advantage for the Fund. Real estate provides diversification benefits, particularly evident during volatile equity markets.
In such situations, a single-digit positive return is preferable to a negative one. Our goal is to achieve double-digit returns at the total portfolio level moving forward.
Long-term investment approach
We believe in a long-term investment approach. Our investment team has the scale to engage with nearly every capital market and investment opportunity in the East African region.
The Fund's unique characteristics and controllable circumstances drive our investment strategy.
We manage our portfolio to meet both current and future obligations, ensuring timely benefit payments, achieving real long-term annualised returns, and minimising the risk of significant, sustained asset drawdowns.
This approach allows the Fund to withstand short-term downturns and focus on creating long-term value.
The progress made since the last fiscal year is summarised in Table 3 below:
Table 3: The progress made since the review of the fiscal year 30 June 2024
| No. | item | Progress |
|---|---|---|
| a) | Reducing the allocation to fixed income to 75% of the investment portfolio. The minimum allocation is 70% while the maximum is 82.5%. | Achieving the optimal target remains 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 below 80% at 79.6% (it increased from 78.48% last year). |
| b) | Increasing the allocation to equities to 17.5% of the investment portfolio. This will include listed and private equity. The minimum allocation is 12.5% while the maximum is 20%. | The optimal target weight is still a work-in progress. In the fiscal year, allocation to equities increased to 13.32% (from 12.51% last year) on account of the recovery in equities on NSE and new investments in Airtel and MTN in Uganda. |
| 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. The minimum allocation is 5% while the maximum is 10%. | This was largely achieved. The allocation reduced from 9% in 2023 to 6.9% in the most recent fiscal year ended 30 June 2024. The Mbuya Citadel is now fully sold. Solana selling is ongoing. The reduction in allocation was largely caused by project delays at Pension Towers, Temangalo, Off taker, Bwebajja, and the Yusuf Lule projects. |
| d) | Unlocking the value of real estate land by producing concepts to have it developed. | Construction works are ongoing in Temangalo and Mbale. Progress was also made on the Pension Towers. A Design and Build Contractor was procured for Yusuf Lule Road. The project is still at the design stage. |
| e) | Diversifying by country (within the investment universe), asset class, sector, currency, and many other risk factors. | This continues to be a work-in progress. We deployed over UGX 300Bn in equities. We were also affected by the disruptions in Fund activity in the last half of the fiscal year. |
| (f) | Exploring new asset classes that improve the risk-return profile of the Fund. | We continue to engage the legal and regulatory framework and other partners for diversification opportunities. |
The plans for the year ahead
On average, we anticipate the economies of the countries we invest in will grow by 5% to 7%. We expect yields in the region to remain elevated, while inflation should stay within targeted ranges across our markets.
In this high-yield and growth environment, we aim to achieve our double-digit return target.
Nonetheless, given the continuance of heightened geopolitical factors and uncertainty as to when stability can be restored, there is a downward risk of volatility.
Navigating market volatility and uncertainty requires innovation and leveraging our structural advantages.
Outlook
Our investment management strategy focuses on achieving the following goals:
a) Setting a well-thought-out asset allocation that balances the collection of acceptable risks.
b) Carefully selecting and sizing a range of strategies that we believe can achieve our investment objectives.
We will continue to use a comprehensive portfolio investment framework to achieve our dual goals of competitive returns and long-term member empowerment. Our commitment to the Fund’s purpose is unwavering: to provide economic security and promote saving as a way of life. We remain dedicated to the Fund’s success and sustainability.
Our mission is clear: manage the Fund’s investment portfolio cost-effectively, transparently, and with a focus on risk to generate value for members. With a skilled investment team and a well-thought-out strategy, we are confident in our ability to deliver strong , long-term performance.
Gerald Paul Kasaato, CFA, Chief Investment Officer
A NEW DAY - CREATING SHARED VALUE FOR SUSTAINABLE GROWTH