Investment strategy directed by clear policy

The investments made by the Transport Sector Retirement Fund improves the lives of its members

The investments made by the Transport Sector Retirement Fund improves the lives of its members

The Transport Sector Retirement Fund has assets of R5.8-billion, which are carefully invested in compliance with the fund’s investment policy statement and Regulation 28.

The fund has an investment goal of enhancing returns to members on a sustainable basis.

“Historically, investment returns were provided for as bonuses declared at the end of a financial period and allocated to each member’s individual account,” says Joe Letswalo, principal officer at the Transport Sector Retirement Fund.

“An interim bonus is also declared to be paid to those members who exit the fund before the declaration of a final bonus. For these purposes an investment smoothing reserve was maintained.

“From March 1 2016, the fund’s investments were unitised monthly, which allows the fund to update member benefits with the full monthly investment returns earned by investments each month, as opposed to bonus declaration arrangements, whereby investment returns are declared only annually,” says Letswalo.

He explains that the fund uses an asset liability modeling exercise as input in the development of its investment strategy. The asset liability modeling exercise is reviewed at least every two years or when a drastic change happens regarding the membership profile.

The investment strategy is, therefore, based on the latest asset liability modeling report, which indicates:

  • The demographic profile of the fund beneficiaries;
  • The investment horizon of the members of the fund;
  • The required liquidity;
  • The maturity of the fund — whether the fund has stable, growing or declining membership;
  • The various categories or accounts of liabilities; and
  • The expected return and risk of various asset class categories available for the fund to invest in.
  • “Asset managers are appointed by the trustees to exercise discretion in investing the fund’s assets, which includes decisions to buy, hold and sell securities in amounts reflective of the asset manager’s investment views.

    “Asset managers’ discretion is defined within the policy objectives, guidelines and strategy set-out in the fund’s investment policy statement and clarified in the investment mandate that the fund agrees on with the asset manager.

    “The performance objective is accomplished by maximising the portfolio’s active risk-adjusted return to enhance the total return.

    “Each portfolio that forms part of the fund’s investment strategy is assigned a benchmark that is used as a tool to measure its performance.”

    Letswalo says the performance objectives of the fund are as follows:

  • Member Share Account — investment returns of at least CPI (consumer price index — the official measure of inflation) + 4.5% (net of fees) over any rolling 36-month period with a standard deviation of real returns of between 9% and 14%;
  • Investment Reserve Account — investment returns of at least CPI + 4% (net of fees) over any rolling 36-month period with a standard deviation of real returns of between 7% and 12%;
  • Contingency Reserve Account — investment returns that match at least CPI +1% (net of fees) over any rolling 12-month period;
  • Cell-Captive Asset Account — excess assets to provide returns of at least CPI + 4% (net of fees) over any rolling 36-month period.
  • “In 2016 due to the effects of Brexit, the Trump presidency, downgrades talks and our local political landscape having a negative impact on financial markets, the fund struggled to outperform its objective, yielding a return of 1.46%, which was way behind its target objective of 10.85%. Therefore, the fund decided to implement a three-life stage model in its portfolio to ensure that the returns of the members who are closer to retirement were not negatively impacted by market volatility or unexpected events.

    “The fund performed well in previous years, outperforming its objectives and inflation. For 2014 the return was 11.53% and for 2015 11.46%, outperforming its strategic benchmark, objectives and inflation. Over the last 12 months ending May 2017 the Fund’s returns were 1.7%.

    “Over the long term the investments made by the fund improves the lives of members and makes a positive difference to the South African economy,” says Letswalo.