DRIVING RETIREMENT INVESTMENT STRATEGY IN A LOWER-RETURN ENVIRONMENT

What should trustees be considering to generate sufficient returns for their members?

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South Africa currently finds itself in a whirlwind of uncertainty - impacted by a variety of macro- and micro-economic factors that have resulted in lower returns for members. Despite this, fund managers and consultants need to persist with the important work of retirement planning and continue to explore ways to drive positive fund performance so that members are able to achieve their retirement objectives. 

This was the main point of discussion at the 2017 Old Mutual Corporate Consultants Breakfast - an event aimed at retirement fund trustees and management committee members. Dave Mohr, Chief Economist at Old Mutual Multi-Managers, said that, against a backdrop of global market volatility influenced by increased natural disasters, coupled with the rise of extremism and populism globally, one would expect the picture painted by investment returns to be far more dismal. “The South African economy, not unlike other global economies, has been plagued by a variety of factors hindering economic growth, and, in turn, investment returns.”

He said that in recent years, South Africa has faced a stagnating economy, but that an upturn in global markets had produced signs of slight improvement. “The global economy looks positive, with growth rebounding everywhere and inflation remaining subdued. This should support South African exports and commodity prices, thereby helping the mining and related industries to boost our economy.”

He explained, however, that while the local economy pulled itself out of a recession in the second quarter, it is unlikely to continue its gradual improvement or, worse, could potentially slip back into recession. “Business confidence levels are an important consideration and are being eroded by the lack of growth and ongoing political and economic policy uncertainty. So while some improvement in economic growth is expected it is likely to be very subdued.” He emphasised that with this continued sense of uncertainty, it is therefore important to regularly review retirement savings strategies – to ensure alignment with long-term investment goals. 

Also speaking at the event, Rodney Msimango, Senior Consultant at Old Mutual Corporate Consultants, explained that during volatile economic times, one of the most important roles played by the consultant is to review client strategies and set the right expectations in terms of performance. “Clients need to understand the causes of a lower return environment and why it is unavoidable. At the same time it is also important to discuss with clients the factors that can be controlled by trustees and investment professionals, such as the impact of fees, diversification and benefit design, and those that cannot be controlled, such as macro, socio-political or economic events.

“In some cases, a strategy review may result in a slight adjustment to the asset allocation and hence to the risk profile of the strategy, although we would not expect these to be significant changes if the strategy has been well planned. The strategy should not be tinkered with to try to suit prevailing market conditions as that is tantamount to market timing and this can be damaging.” 

Furthermore, he pointed out that the impact of fees will be felt even more acutely in a lower return environment. “We must therefore continue to investigate all avenues to keep costs as low as possible and this may require the re-negotiation of some mandates with asset managers, in order to bring fees down. This does not however imply a shift to index tracking only as, in a lower return environment, any alpha added by a good active asset manager will add significantly to overall returns. Value for money is critical – it’s important to make sure that you get what you pay for.” 

Another element that Msimango says is crucial in maintaining a successful retirement saving strategy is good benefit design. “The investment strategy cannot overcome poor decisions in relation to the benefit design of the fund and hence the build-up of assets on which the investment strategy (and compound interest) can work its magic. Important design-centric decisions that need to be continually reviewed include, among others, the level of contribution as a percentage of salary, the definition of pensionable salary relative to the total cost to company, the retirement age of the scheme and the ability to preserve inside the fund, thereby staying on track and paying wholesale rather than retail fees.” While not a new factor, he explained that diversification will continue to play a crucial role in a low-return environment to ensure that clients’ investment strategies have exposure to a range of different return drivers to insulate them against a fall in one particular asset.

In addition to this, Msimango says that a further area in which trustees, and the retirement funds they manage, can play an important role is transformation, with specific focus on certain aspects namely adhering to codes of good practice, responsible investing and targeted investments. He said that transformation is an important factor in driving positive growth for the broader economy, thereby ultimately driving stronger returns for members. “As trustees, we have a fiduciary duty to act in the best interests of members. Not only in providing the best returns possible for members, but also in taking decisions that are in the best interests of driving positive growth for South Africa as a whole.”

Msimango said that as part of a good diversification strategy, trustees should be making use of the full bouquet of growth assets, which include equities, property and alternative investments. “Targeted development investments can be utilised effectively during this period of low returns. If selected correctly, these investments can provide funds with strong, diversified returns.” He said that investments into areas such as housing, infrastructure, schooling and alternative energy production have provided strong returns over the past 10 years and have a direct and visible societal impact.

“Pension and provident funds are the custodians of the retirement savings of employed South Africans and, as one of the largest investors in the South African economy, they have a responsibility to contribute to the transformation of South African society.”

Msimango concluded that while the current climate may be challenging, these circumstances are not expected to continue forever. “We believe in taking a long-term view, however, while the low-return environment persists, it is imperative that trustees are empowered to make the best investment decisions on behalf of their members.  It is the critical role of the adviser to continue to educate clients and members in this respect, as well as guide them on how best to keep their investment strategy on track.”

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