Edition: June - August 2015
Editorials

FIRST WORD

Expectations on a high

Whether equity markets soar further, or drop precipitously,
should be a gamble for fund trustees to avoid.

The cover story in this TT edition is provoked by a graph that appeared in the last. Updated, as here, it’s no less worrisome. It offers pause for thought on what if, or when, the jaws of the crocodile eventually close.

It also begs cause for action, specifically from pensionfund trustees. They stand to be tested on two fronts: first, on whether (and, if so, how) the value of their funds’ portfolios can best evade sudden diminution; second, on whether there’s efficacy in the role proposed for them by National Treasury to offer members advice on investment options (see box).

Inevitably, crocodile jaws do close and usually with a snap. As Glenn Silverman of Investment Solutions has argued, the gap between the graph’s trend lines cannot be sustained (TT March-May). They indicate either that the markets are anticipating a rapid pick-up in worldwide economic recovery or a severe fall in share prices. Which is it to be?

To guess is pointless. To watch for risk/reward imbalances is essential. Were bull markets to morph into bear, trustees won’t relish the reaction from fund members accustomed to neat increases in their annual benefit statements.

Retail investors are told often enough not to time the markets. Trustees who don’t know that the best protection is asset diversification shouldn’t be trustees. But a critical problem is in the here and now. It applies particularly to fund members approaching retirement who cannot take the chance that the termination of their days as salary earners coincides with a collapse in the capital values of their various portfolios.

Painful memories of those hammered by the 2008-09 financial crisis remain fresh. Praying that it won’t happen again is insufficient. The big international banks, held primarily responsible for the systemic chaos, are still too big to be allowed to fail. Some have continued to behave badly, evidenced by the fines imposed on them for market abuse and manipulation.

TRUSTEES' UNENVIABLE CHALLENGE

 National Treasury’s 2013 discussion paper, ‘Retirement reform proposals for further consideration’, put it thus:

Pension and provident funds will be required to identify a default preservation option for their members....Trustees must abide by a set of principles in the selection or design of this fund and will be given a degree of legal protection in respect of this choice...provided that certain conditions are met, including that members are given access to commission-free independent financial advice when they leave the fund, paid for by the fund.

Roll on the advisers and trustees more prescient than they were for members who’d planned to retire in late 2008/early 2009.

Then too there’s the recent observation by an FT commentator. The market for structured products, such as collateralised debt obligations that triggered the last crisis, is again booming. Also, he finds, credit underwriting standards for loans have dropped back to pre-2008 conditions. “Auto and student loans may be the new subprime”, he warns. If this analysis is even nearly correct, it’s chilling.

SA equity markets – where larger companies have diversified their earnings bases offshore, so providing automatic hedges against rand weakness – are inclined to march in lockstep with world bourses. Asset prices have been buoyed by oodles of cheap money, and nobody can fully anticipate the consequences once quantitative easing (central banks’ money printing) gives way to higher interest rates.

In April, the Global Financial Stability Report of the IMF advised that risks have risen worldwide. It contends that a sudden rise of 100 basis points in US Treasury yields is “quite conceivable” and that “shifts of this magnitude can generate negative shocks globally, especially in emerging-market economies”.

On top of this is a geopolitical environment that looks more dangerous than it has in decades. At the same time, lacklustre economic prospects permeate western economies. In the US, which leads the way, artificial stimulation of share prices by share buybacks has disguised earnings weakness.

There are few positives to counterbalance the negatives. The once-vaunted BRIC(S) have themselves turned into a mixed bag of troubled (Brazil, Russia) and moderated fortune (India, China).

SA has its own growth constraints, like electricity, unnecessary to itemise. Heaven forbid that they’re compounded by a downgrade to junk rating of sovereign debt, sparking foreigners’ flight from capital markets and soaring interest rates. But an investor’s glimmer is in the huge need for African infrastructure, an asset class on its own, provided there’s a sufficiently large pipeline of long-term deals offering secure long-term returns that SA institutions can comfortably access.

Caution calls. Take a leaf from what a leader of the local savings industry is doing with his own money. Johan van Zyl, due to retire as Sanlam chief executive, has collared the value of his Sanlam shares. Since their rapid climb to almost R80, he’s sacrificing the potential upside from above R86 by protecting the downside from below R65. Perhaps pension funds should start to think similarly.

Allan Greenblo,
Editorial Director