Issue: March/May 09


Think long term

Especially now, when the equities market is sick. ROB RUSCONI urges trustees to stick to strategies consistent with funds’ time horizons.

Ask a basic question: Why should pension funds be investing long term? Simply, it’s because member needs are funds’ core responsibility and members need success over 20-30 years.

Take a man about to set out on a journey from which he’ll return in 25 years. While away, he’d need his portfolio of assets to perform as well as possible. So he’d surely invest predominantly in shares, the drivers of the economy, because he needs his portfolio to deliver performance at least in line with economic growth.

He’d require the asset manager he appoints to invest in companies expected to perform well in the long run because that’s what he cares about. These companies would run sustainable, stable businesses with the ability to survive and thrive. They’d have good ideas, good infrastructure, good management and good workers.

He would ask his asset manager to limit the extent to which it traded in and out of companies, requesting instead a choice of companies for the long term. He does that because he knows how expensive trading is, that it is ultimately a zero-sum game and that, on average, trading destroys value, feeding somebody other than him.

At the heart of it, he cares more about worth than about price. He knows that what matters over extended periods is the value of the stock he purchases, not its day-to-day price. And he won’t worry that he will be out of contact for 25 years as he is investing for 2034, not for tomorrow.

Trustees, these are your members’ needs. They are investing for their retirement and will need to live largely off these assets when they get there. Your investment policy statement should recognise these important attributes of your prudent approach to taking care of the assets of the fund.

There are other reasons to adopt an investment philosophy that is long term in perspective, stable in approach. Trustees (as well as their asset managers and investment advisers) are less likely to make the mistakes that a short-term approach tends to create. They are less likely to find themselves responding to sentiment, reacting to price and ignoring value, or getting too involved in largely unnecessary but enormously compelling analysis.

If unnecessary trading of securities is wasteful, consider how much more expensive frequent changing of service providers could be. Changing often involves substantial modifications to the portfolio and out-ofpocket costs.

For trustees to think and act long term is essential to the success of the fund and its members. There are ways to help trustees stay on track:

  • The investment policy statement of the fund is a declaration of strategy that regularly reminds trustees that they select securities for their sustainability. It should emphasise a process of disciplined decision making. It must include a clear explanation of how value is to be gained from different asset classes and how the attributes of each contribute to the objectives;
  • Any service provider involved in developing the approach to asset allocation understands it. The core investment strategy of the fund is broadly stable because it has an appropriate time horizon;
  • The fund selects its asset managers on the basis of their approach to investing for long-term success;
  • The fund monitors and assesses managers on their processes and commitment to this philosophy, not on their performance over the past quarter. The trustees do not disregard performance figures, but neither do they give them undue weight. They require managers to explain how and why their investment process has changed, if at all. Trustees ask them to back this up with stock-bystock motivations for the securities they have bought and sold;
  • The fund watches its costs, because these are not recoverable. Fees erode the value of member assets and costs will gain new significance in a period of low returns;
  • Trustees and the fund’s principal officer must live their long-term approach and, in their communication with members, not hesitate to speak it frequently.

Trustees are caretakers of fund members’ wealth and collectively represent a large proportion of the nation’s investable wealth. They are positioned to ensure this wealth is directed to maximise the long-term outcome, for members and the economy as a whole.

Rusconi consults on old-age and social policy, investments and pensions, to public and private sector clients in SA and abroad. His discussion paper Institutional Investments: Whose Money is it Anyway? is available for download at