‘Low in­fla­tion means re­tire­ment funds can al­lo­cate more to cash’

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gen­er­ate a real (af­ter-in­fla­tion) re­turn.


He said cash is the ul­ti­mate pos­i­tive-re­turn as­set class, hav­ing no volatil­ity.

“When it comes to re­tire­ment sav­ings, no­body likes sur­prises. Cur­rently, how­ever, given the low and fall­ing in­fla­tion rates and rel­a­tively high yields, cash in re­tire­ment funds can com­fort­ably achieve a 3% real re­turn, which means that cash can make a sig­nif­i­cant con­tri­bu­tion to bench­mark-beat­ing re­turns in a low-risk man­ner.

“This is a great op­por­tu­nity for re­tire­ment fund trustees to in­crease their cash al­lo­ca­tion and achieve bet­ter risk-ad­justed real re­turns, which are cru­cial considerations for re­tirees given the cur­rent eco­nomic and po­lit­i­cal cli­mate.”

Quaniet Richards, the head of in­sti­tu­tional at Ned­group In­vest­ments, said re­duc­ing or elim­i­nat­ing risk in re­tire­ment funds has be­come al­most an over­rid­ing con­cern for re­tire­ment fund trustees.

“With the flat yield curve, low in­fla­tion and steady cash yields, it makes ab­so­lute sense for a higher cash weight­ing, as this will not com­pro­mise re­tire­ment fund re­turns, but will cer­tainly im­prove the qual­ity of re­turns.”

Se­gar said that, given the cur­rent yield on cash, in­creas­ing the al­lo­ca­tion to cash not only serves as a valu­able tool to lower risk, but it also con­trib­utes to de­liv­er­ing real re­turns.

He said the more cash in a re­tire­ment fund, the lower the over­all risk of the fund.

“Fur­ther­more, the liq­uid­ity of the cash al­lo­ca­tion pro­vides trustees with the flex­i­bil­ity to re­main nim­ble in the cur­rent chal­leng­ing en­vi­ron­ment and to eas­ily and ef­fi­ciently de­ploy the cash to other as­set classes as the op­por­tu­ni­ties arise.”

Se­gar said the high real re­turns from cash re­duce the po­ten­tial “op­por­tu­nity cost” of hav­ing a large cash al­lo­ca­tion, as op­posed to be­ing in­vested in a higher-risk as­set class. With risk a big con­cern for trustees, the op­por­tu­nity cost is less of an is­sue.

He said a higher al­lo­ca­tion to cash en­ables trustees to re­as­sure mem­bers that a re­turn of 3% above in­fla­tion is locked in on the cash por­tion of the fund, pro­vided in­ter­est rates re­main sta­ble. The ad­di­tional ben­e­fits are liq­uid­ity and not ex­pos­ing mem­bers to ad­di­tional risk.

He added that the grow­ing num­ber of money mar­ket funds that com­ply with reg­u­la­tion 28 of the Pen­sion Funds Act (which gov­erns in­vest­ments in re­tire­ment funds) are the ideal place for re­tire­ment funds to “park” or in­vest their cash.

“A money mar­ket unit trust fund is the ideal ve­hi­cle for a re­tire­ment fund to use as the cash build­ing block in a re­tire­ment fund. These highly reg­u­lated in­vest­ment ve­hi­cles of­fer the yields of fixed de­posits, full liq­uid­ity, con­ve­nience and di­ver­si­fi­ca­tion, and are typ­i­cally man­aged by spe­cial­ists with large ben­e­fits of scale.”


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