Edition: June - August 2015
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
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
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