In late 2016, Andrew Canter, CFA, and his Futuregrowth Asset Management firm sent a clear but unexpected message to the South African state-owned enterprises (SOEs) it had been funding for years: enough is enough.

Futuregrowth, one of South Africa’s largest asset managers, was growing concerned about what it saw as signs of weakening governance at the SOEs and even had some suspicions of creeping corruption.

Opening quotation mark

Futuregrowth announced it would suspend loans to six of the largest SOEs.

Closing quotation mark

On 29 August 2016, employees at Futuregrowth suspended negotiations on loans totaling R1.8bn to two SOEs. A couple of days later, the company announced it would suspend loans to six of the largest SOEs until it was able to perform governance reviews and assessments.

This included companies in developmental sectors as diverse as power utilities, credit providers for farmers, and even the Development Bank of Southern Africa, which funds infrastructure. “It was a terrible choice to make,” says Canter, “either to withdraw funding from these key developmental companies, or to provide finance despite evidence of growing malfeasance.”

“We decided to stop making loans to these state-owned enterprises until questions about their governance structures had been resolved,” recalls Canter, Futuregrowth’s Chief Investment Officer. “Our job is to protect investors over a 30-year view. At the time, because of the lack of transparency and the fluid political environment, we couldn’t justify granting SOEs long-term loans.”

Besides protecting Futuregrowth’s clients, the decision was a landmark attempt to defend ethical investing standards at a critical moment. Evidence was mounting of a conflict between the presidency of Jacob Zuma and the National Treasury. Mr. Zuma’s administration, dogged by corruption allegations, was also seeking to increase its influence at the SOEs via a newly formed oversight body whose official mandate was vague. On 14 February 2018, under pressure from the ruling African National Congress, Mr. Zuma resigned.

It should have come as little surprise when Futuregrowth drew a line in the sand. The Cape Town-based asset manager started life in 1995, focusing its first funds on infrastructure development, social services, and funding black economic empowerment. As Futuregrowth puts it, “the aim was to earn sustainable returns for pension fund investors while also investing for South Africa’s development.”

Today, the company manages around R178bn of clients’ assets across a full range of fixed-interest and developmental funds that have channeled capital into sectors such as infrastructure and retail property development in townships and rural areas. Futuregrowth has also initiated deals for low-income housing construction and urban regeneration, among others.

“Investors can play a positive role in society while also generating sound investment performance for pension fund members,” says Canter, a 55-year-old CFA® charterholder who was born and raised in Boston and arrived in South Africa almost 30 years ago. “It is all about responsible and sustainable investing.”

Canter, who commutes daily by bicycle, says the decision to suspend the loans in 2016 was unanimous. “There were about 25 members of the investment team in the room,” he recalls. “Everyone agreed that it was the right thing to do.”

Yet saying “no” also spoke to his own financial education: “Fifteen percent of the grade on each CFA exam is ethics related,” he says. “You get a sense of being a responsible investor, a sustainable investor. It really does affect your decisions.”

More than 18 months later, there are signs that some things are changing for the better. Canter says that all six of the named SOEs have engaged with Futuregrowth and, in some cases, they came to agree on improved governance and better disclosures to the bond market.

Opening quotation mark

There was a growing awareness of the role of civil society in defending democracy. Our decision became part of that story.

Closing quotation mark

Futuregrowth has resumed lending to four of the original six companies. It has yet to clear lending to Transnet and Eskom, which have struggled to return to credit markets.

Today, the asset manager is larger than it was in 2016: last year, it had net positive client flows of R2.1bn. But that performance masks a traumatic time in Futuregrowth’s history.

For one thing, the decision to stop making loans to these SOEs went against its clients’ immediate positions: it held about R30bn of the companies’ debt, equivalent to roughly 20 percent of Futuregrowth’s total capital under management at the time.

“Because of our developmental focus, we hold long-term debt to the SOEs and took the view that we’d serve our clients best by ensuring the long-term creditworthiness of those entities, even if the short-term impact was painful,” says Canter.

Opening quotation mark

There were even moments when Canter feared for his safety.

Closing quotation mark

In addition, several clients, some of whom had connections to the government or to the SOEs, fired Futuregrowth. That led to SOE-related withdrawals of about R4.8bn, roughly 3 percent of assets under management. “We lost some large clients, but we are philosophical about that,” he says. “We had to do what was right for investors.”

At that time, there were even moments when Canter feared for his safety: he was harangued both privately and by the hosts of a pro-government news channel when he appeared on television.

“During 2016 there was a creeping sense of decay and a growing awareness of the role of civil society in defending democracy,” he says. “Our decision became part of that story.”

But Canter, who plans to stay in South Africa for the rest of his professional career, remains confident. As he puts it, “things got tense but I never stopped riding my bike to work.”