De-risking and fiduciary duty

Azola Zuma

In a landscape of continuous change and disruption, and in an investment environment marked by low growth and geopolitical instability, retirement fund trustees have to find new ways to meet their fiduciary responsibilities, said Azola Zuma, chief executive of Sanlam Investment Management at the recent 2017 Sanlam Investments Institutional Insights conference held in Johannesburg.

Leading fellow fiduciaries agreed they may have no option but to consider retirement funding solutions outside traditional asset classes, while carrying a new perspective on fiduciary risk.

That was the theme of the Sanlam Investments Institutional Insights conference which gave the floor to leading experts from the UK and US, as well as local practitioners who have had to apply their minds to meeting their fiduciary responsibilities in a rapidly changing environment.

Azola Zuma said the need for optimal outcomes-based retirement solutions necessitated a look at alternative asset classes such as unlisted property, private equity, hedge funds, and infrastructure instruments. Such alternatives stood to deliver higher yields as traditional asset categories such as equities, bonds, listed property and cash stagnated in a low-growth global environment.

“Pension fund legislation allows funds to allocate up to 15% of their assets in a combination of private equity and hedge funds, yet on average retirement funds have invested only 3.7% in such assets. One has to ask if trustees are embracing change enough in order to deliver on their fiduciary responsibility in a low-yield environment,” said Zuma.

In a global context, US economist and political adviser Pippa Malmgren bemoaned the fact that so many fund managers were ignorant of the real world, depending more on mathematics and hard data when they compiled their portfolios.

“They are blind to the geopolitical economy. That’s why so many of them missed Brexit, missed Trump, missed the slowdown in China. You can’t quantify everything, which is why imagination remains the single most important quality for a fund manager.”

Malmgren said too many market participants remained fixated on risk, rather than looking for opportunities thrown up by geopolitical change. Instead of being terrified by cryptocurrencies like Bitcoin, investors should look at the possibilities thrown up by quantum-powered blockchain and who will profit from it.

“China is moving fast in terms of computing power; the processing of information. It’s the new arms race. You have to open both eyes to see it — not everything is reflected in market data. With the right framework, the right imagination, investors can take advantage of the future.”

Despite the superficially distressing spectre of conflict in Syria, North Korea and the Ukraine, there are far better things to worry about, said Malmgren.

“Markets will keep going up. People think I’m crazy but all that spending since the financial crisis has to go somewhere, and I believe it’s going towards innovation. All the political noise makes us miss investment opportunities. Don’t bet against the fourth industrial revolution.”

In light of the push towards optimal portfolio construction by incorporating alternative investments, Guy Fletcher, Head of research and customised solutions at Sanlam Investments, advanced the case for constructing portfolios that took advantage of diversification and uncorrelated returns.

Fletcher conceded that alternative investments required a higher level of oversight, that valuations were not as efficient, and that liquidity was reduced by the longer lock-ins required to see returns. However, given that South Africa’s regulators allowed a generous allocation to alternatives, it was imperative that trustees and managers took advantage of the opportunity for significant outperformance.

“As the market matures, there will be more vehicles for funds to access. For early adopters, though, there is the potential for elevated risk-return efficiency via uncorrelated alpha, as well as the obvious benefit of diversification,” said Fletcher.

Lesley-Ann Morgan, global head of defined contribution and retirement at Schroders in London, said the imperative among retirement funds all over the world was to find optimal “default” solutions for those without access to expensive financial advice. This included South Africa, where people remained under-saved and under-funded.

Morgan stressed that most retirees underestimated both their longevity and the effect of inflation on their savings. Hence, although the major problem remained the lack of personal provision for retirement, the challenge for trustees was to “take more efficient risk” with available funds. Such an approach may well involve the use of alternative investments, she said.

As an actuary, Morgan said that constructing a properly diversified portfolio was relatively easy. Given the retiree’s savings, likely longevity, and income requirements, hybrid strategies involving all assets — including alternative classes — can be developed to meet reasonable needs within the parameters of inflation. Furthermore, a combination of cash from government funded social security and both living and guaranteed annuities can be tweaked to find simple, adequate solutions.

The more pressing problem, however, was that too few people have enough retirement savings to begin with. And that was the overriding concern of all participants at the conference.

“There is no killer answer,” said Morgan.

These are just some of the key insights trustees could leverage to deliver positive retirement outcomes for their members. Institutional Insights has become a popular and dynamic platform, where delegates come together to discuss the ongoing challenges facing fiduciaries, and we look forward to continue sharing rich insights and global perspectives.



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