Investing during the age of turbulence

The past few weeks have seen significant market volatility across the globe - leaving many trustees and members in a state of confusion. However, trustees can protect themselves and their members from significant financial loss by paying close attention to the details of their particular fund.

This is according to Windall Bekker, Head of Investment Consulting at OMAC Actuaries & Consultants, who says that trustees who familiarise themselves with all the details of their fund and fund membership will be in a much better position – not o­nly to make the most appropriate investment decisions for their members, but also to communicate effectively with members throughout the process.

“During times of extreme volatility and uncertainty it is helpful for trustees to understand every aspect of their funds. First of all, trustees should have a detailed understanding of the fund members they represent. This includes, but is not limited to age, gender, accumulated credits, and contribution rates,” he says.

According to Bekker, trustees also need to be clear o­n what the target replacement ratio is and understand the effect that changes in various factors, such as age to retirement, changing contribution rates and differing investment objectives, will have o­n the replacement ratio.

Secondly, Bekker advises trustees to clearly define the fund investment objective. “Trustees need to be clear what the investment objective of the fund is in order to achieve the target replacement ratio.”

He defines the investment objective in terms of return above inflation. “Inflation rates and increases in inflation have a significant effect o­n the fund’s ability to achieve the target replacement ratio. Therefore, as inflation increases so the target investment objective above inflation needs to increase in order to reach the target replacement ratio,” he says.

Thirdly, Bekker says trustees must clearly define and understand the fund’s investment strategy. He says the fund’s investment strategy is the long term strategy that will enable the fund to achieve the investment objective that will result in members reaching their target replacement ratio.

“It is extremely important that trustees understand that the investment objective and fund strategy are long term in nature while market volatility and extreme events are generally short term in nature. Therefore, it is helpful to communicate the investment philosophy such as 'defend against losses, benefit when markets rise'."

Finally Bekker urges trustees to monitor the fund’s performance o­n a consistent basis against the investment objective and peer group – and to keep members informed in each instance.

“Trustees should expect periods when the fund exceeds its investment objective as well as periods when it lags the objective. They should have a clear communication strategy to members - keeping them educated about the long term nature of the retirement fund’s investments as well as reasons behind any shortfalls against the objective in the short term.”

Bekker says trustees should also communicate more regularly with members during periods of extreme events, explaining what is happening and the consequences for the fund. At the same time, he says members must be reminded about the long term nature of retirement fund investing.

Bekker attributes the recent wave of market uncertainty largely to three factors: The raising of the US debt ceiling, the US rating downgrade and the recent Eurozone uncertainty. He stresses that members must be made aware of such issues and how they will affect the economy and the fund.

“There was significant concern that unless the US increased its debt ceiling it would be unable to repay its debt obligations, which would result in the first debt default payment in US history. Furthermore, the Standard & Poor’s rating agency downgraded US debt, increasing concern about the ability of the US to repay its debt obligations. Then, compounding these fears, significant concerns across the Eurozone about debt defaults and bailouts caused widespread insecurity in the markets. Trustees need to ensure that members are kept up to date o­n these issues so that the impacts o­n the funds do not come as a complete shock,” he explains.