Lower expected returns and increasing longevity.
JOHANNESBURG – Amid heightened uncertainty in global markets, an expectation that investment returns will be lower going forward and a dramatic increase in the average life expectancy, decisions around the investment of pension fund assets are under renewed scrutiny.
Will members have adequate resources to retire when the time comes?
This question is keeping pension fund trustees awake at night, says Giles Mokoka, MD for SEI Investments South Africa.
SEI is a Nasdaq-listed multi-manager, which serves more than 20 South African clients – mostly pension funds – through its Johannesburg office.
While data suggests that the percentage of South Africans that can retire comfortably without adjusting their lifestyle is fairly low, for those involved in pension fund investment decisions, the current landscape presents considerable challenges.
Mokoka says the concern in the local market is whether future earnings will support the current high price-earnings-ratios.
Moreover economic growth expectations have consistently been revised downwards and there are strong indications that growth may not reach 2% this year.
“Low economic growth will have some effect on returns and the problems with power generation are not helping,” he says.
A fresh look at mitigating risks
Mokoka says in times of heightened uncertainty, it is always advisable to focus on risk management, rather than just on achieving higher returns.
One of the ways of reducing portfolio risk is through diversification – not only geographically but also through exposure to other asset classes like infrastructure, private equity and other alternatives, he says.
The international stock market landscape has changed quite considerably over the past decade.
Mokoka says whereas the US used to be the largest investment destination, these days 64% of the investable universe are outside the US. Emerging markets have become much easier and cheaper to access and liquidity has improved.
In Africa specifically, there is more political stability, more reform, better corporate governance and these improvements mean that investors are starting to diversify much wider, he says.
“Global diversification has been referred to as the only free lunch in investment.”
Mokoka says investors need to avoid being stuck in their own backyard – sometimes investors mistake familiarity for safety.
It is also important to be on the lookout for unexpected outcomes in global markets – for example the geopolitical risks associated with Russia.
But should pension funds take on more risk in an effort to get higher returns?
Mokoka says for investors to assume that taking higher risk will automatically lead to higher returns is the wrong view. Investors should rather focus on risk-adjusted returns, in other words the chances of getting a higher return for every unit of risk.
“I think investors must make sure they are diversified, make sure that they have reasonable expectations and also remember that investment is for the long term.”
For an investor with a 15 to 20 year investment horizon prior to retirement, things that happen in a six-month period are really just a flash on the screen, and investors should bear this in mind, he says.
While global markets are widely expecting the US Federal Reserve to hike rates in the near future, the first hike or first few hikes won’t necessarily be bad for the US equity market, Mokoka says.
Some research has shown that in the 12-month period following the Fed’s first rate hike, US markets, the S&P 500 in particular, has tended to be positive and have been up around 7.2% following a rate hike on average, he says.
Looking at equity markets more broadly, any potential pullback will offer an opportunity to buy on the dip and to add to the strategic positioning rather than to change views altogether, he says.