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.