INVESTMENT STRATEGY
The CAPE PENINSULA UNIVERSITY OF TECHNOLOGY RETIREMENT FUND iis a defined contribution retirement fund. The long-term investment performance of a defined contribution retirement fund affects the size of your retirement benefits. The Trustees understand that a key area in which the Fund needs to succeed is to provide members with appropriate investment portfolios and to provide sufficient and appropriate information for members to make informed decisions.
The starting point of any investment strategy is to define the purpose of the Fund. Put another way, the Trustees have tried to answer the question – “Why does the Fund exist?” The Trustees have answered this question as follows:
“The Fund exists to target reasonable retirement benefits for members. A reasonable retirement benefit for an in-service member with 35 years of service at retirement and an average career progression is a capital sum of some 12 to 13 times pensionable salary at retirement. The Fund must also provide a reasonable (but appropriately limited) choice of investment vehicles to those members who require more control over their retirement fund investments and who prefer to take responsibility for their own investment decisions.”
The reasonable retirement benefit is a target that cannot be guaranteed. The target is based on the assumptions that 19.408% of the member’s pensionable salary will be set aside as retirement savings, that the investments will earn at least 4.0% to 4.5% per annum in excess of inflation over the long term, and that the member will retire at age 65.
The Fund’s investment strategy is detailed in its Investment Policy Statement. This section covers the following:
• Investment philosophy the Trustees have adopted
• Investment objectives for the portfolios
• Investment Approach
• Approach adopted by the Fund
• How the Fund chose the investment managers
Disclaimers
Investment is a complex area and every attempt has been made to simplify this for ease of understanding. This may result in some areas being covered in relatively little detail. Readers should note that:
• Past investment performance is not necessarily a guide to future investment performance. The statistics shown in the guide are based on past performance;
• The information contained in this guide does not constitute advice by either the Board of Trustees, nor its advisors; and
• Members may need to seek expert financial advice before making an investment decision.
INVESTMENT PHILOSOPHY
• Primarily the Trustees have adopted a long-term time horizon in formulating the Fund’s investment strategy. This means that the overall success of the strategy will be measured over periods of at least 7 years.
• The main risks carried by members of the Fund are:
- Inflation risk - this is the risk that the Fund does not earn a sufficient return to be able to provide a reasonable retirement benefit. The Fund will therefore measure its success by comparing its return relative to inflation over periods of 7 years.
- Loss of capital - it is important that members are provided with an increasing degree of capital security for the 7-year period leading up to retirement age.
• The Trustees have assumed that the most appropriate indicator of investment risk is the time to retirement of the member. Younger members are assumed to place priority on management of inflation risk and older members on protection against loss of capital close to retirement.
• To this end the Fund has established 3 separate default portfolios. Younger members will be allocated a portfolio that has the potential to earn returns sufficiently higher than inflation to achieve a reasonable retirement benefit, and older members will be allocated a portfolio that offers a degree of capital protection close to retirement.
• The Fund’s investments must be conducted in a manner that is honest, transparent and ethical.
INVESTMENT OBJECTIVES
The investment strategy has the following two objectives:
• To achieve close alignment between the purpose of the Fund and the investment strategy; and
• Greater focus on short-term protection of your retirement savings in the event that markets deliver negative investment returns.
These objectives are achieved in two ways:
• By allocating the investments of the Fund between different asset classes (such as shares, bonds, cash), and allocating the assets to more than one investment manager that adopt different investment styles (such as value, growth, momentum); and
• Adopting a conservative strategy for the life stage model.
Important note:
The Trustees considered a possible alternative answer to the question on why the Fund exists. The alternative answer is that the Fund exists as a tax efficient savings vehicle allowing members to invest at institutional investment fees instead of retail fees. If this was the purpose of the Fund, it would need to provide a very wide range of investment options. The Trustees believe that most members simply want reasonable retirement benefits, and only very few members would make use of such wide investment choice. The Trustees therefore do not regard this objective as the main purpose of the Fund.
INVESTMENT APPROACH
The Fund will invest a significant proportion of its assets in South African and international equities.
There are various approaches to investing in equities:
• One can simply hold a basket of shares that mirrors the FTSE/JSE All Share Index (or the MSCI World Index for international equities) – this is called passive investing
For example, with this approach if the share market goes up by 15%, the Fund’s investments will also go up by 15% (before deducting asset manager fees and costs). On the other hand, if the share market goes down by 20%, the Fund’s investments will also go down by 20% (before deducting asset manager fees and costs).
• A common investment approach adopted in South Africa is to be what we call a market manager. In this case an investment manager tries to out-perform the FTSE/JSE All Share Index. This means they will buy more of the shares that they think will do better than the index (and consequently hold less shares in companies that they think will do worse than the index).
In reality a market manager tends to take relatively small “positions” away from the index and so will perform rather similarly to the index.
• The value investing approach. A value manager believes that the market either becomes too optimistic or too pessimistic about a particular share.
Value managers believe that over-pessimism gives them the opportunity to buy shares in good companies at a cheaper price than the company is really worth (i.e. undervalued by the market). Value shares are most often good companies that have gone out of favour with the market.
The advantage a value manager has is that he/she is buying shares that are already cheaply priced by the market. This means that if the market goes down sharply, these shares generally will not fall as much as the rest of the market.
If the value manager is right about the company he/she has bought, the market will eventually find this out. In this case the share price will go up sharply and the value manager will make a tidy profit.
The main difficulty with a value manager is that it may take the market a long time to work out that the shares he/she is holding are in fact good companies. This most commonly happens when the market becomes over-excited about an idea (e.g. small South African financial services companies in 1998 and US internet shares in 1999.)
During such a “speculative” bull-market a value manager could under-perform a market manager significantly, but it is unlikely that he/she will lose your money.
When the stock market bubble eventually deflates, the value manager is expected to protect your capital much better than a market manager or a passive manager.
• The earnings revision approach. Under this investment approach, the manager looks to invest in companies where expected future profits are being revised upwards (which is different to the value investing or market manager approach).
• The quality approach. Under this investment approach, the manager looks to invest in companies with strong earnings and stable balance sheets, and low sensitivity to the economic/business cycle
More about value managers
Value managers do two things differently than most other managers, namely:
• They invest with a long term investment horizon (which is consistent with the philosophy of the Fund); and
• They focus on buying very good, but out of favour shares, which they can buy at cheap prices relative to the true worth of the Company. In this way they are contrarians.
This investment approach that was developed in the early 1930’s by Ben Graham. Warren Buffett, the world’s most successful investment manager, was a student of Ben Graham and applies the Graham approach to investment.
This approach takes the view that market sentiment and human behaviour result in the price of companies deviating from their long term intrinsic value. Another way of looking at this is that the intrinsic value of a business generally changes more slowly than its price.
This means that from time to time some companies become very cheap relative to their true value and sometimes they become very expensive. The cheap companies (but still good companies) are often those that have fallen out of favour with the market temporarily and these are the shares the valuation manager will buy.
The expensive companies (which may also be good companies) are those that are in fashion and strongly liked by the market, but the valuation manager will not buy these shares because he/she assesses them to be too expensive.
Whilst this “buying bargains” is a sensible strategy, the difficulty is that excessive market sentiment may result in such managers underperforming the index significantly, especially over short measurement periods (i.e. periods of less than 5 years).
