Ner­vous times

Finweek English Edition - - Retirement fund trustees -

IT’S UN­RE­AL­IS­TIC to ex­pect trustees to be ex­perts on fi­nan­cial mar­kets and in­vest­ments. But good trustees should at least know how the most suit­able in­vest­ment man­agers can be found, and make sure they are reg­u­larly up­dated on the fi­nan­cial per­for­mance of their fund.

But the re­spon­si­bil­ity goes fur­ther than this. En­trusted with look­ing af­ter mem­bers’ re­tire­ment ben­e­fits, trustees also need to take a broad view on fi­nan­cial mar­kets and en­sure cap­i­tal val­ues are pro­tected, even if this means tak­ing a cau­tious stance.

The lo­cal stock mar­ket is cur­rently at a level that’s go­ing to de­mand vig­i­lance from trustees.

“Any in­vest­ment man­ager will tell you tim­ing is ev­ery­thing,” says Dave Ni­col, na­tional ac­count ex­ec­u­tive: in­vest­ment mar­ket­ing at Metropoli­tan Em­ployee Ben­e­fits. “Any­one who has dab­bled in in­vest­ments has dreamt of in­vest­ing at the bot­tom of the mar­ket and get­ting out right at the top. How- ever, when it comes to in­vest­ing trust money, where de­ci­sions in­flu­ence the fu­ture of oth­ers, dream­ing does not en­ter the equa­tion.”

Ni­col feels that con­sid­er­ing the strong bull run since May 2003, the ques­tion trustees must be ask­ing them- selves is: when is the best time to adopt a more con­ser­va­tive in­vest­ment strat­egy?

Us­ing a de­tailed graph plot­ting the 12-month re­turns on the JSE since 1960 rel­a­tive to pre­vail­ing price-to-earn­ings (p:e) ra­tios, Ni­col says his­tory tells us the po­ten­tial for down­side sig­nif­i­cantly out­weighs fur­ther up­side. Ba­si­cally, what the scat­ter-plot shows is that on a p:e ra­tio of 5, the 12-month out­look has far higher up­side po­ten­tial. As the p:e ap­proaches 20, the trend is to­wards ex­treme down­side. When the graph was com­piled, the JSE’s p:e ra­tio was 17.

“Ad­mit­tedly, the graph is only an in­di­ca­tor as it draws on ex­pe­ri­ence gained in mar­ket con­di­tions un­de­ni­ably dif­fer­ent to to­day’s. How­ever, pru­dent trustees would do well to heed the alarm bells where fund as­sets are di­rectly ex­posed to a mar­ket that is test­ing even higher p:e ra­tios. Maybe now is a good time to adopt a more de­fen­sive in­vest­ment approach,” Ni­col says.

P:E RA­TIO: 12-MONTH ROLLING RE­TURNS

Source: Metropoli­tan Em­ployee Ben­e­fits

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