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Given the enormous fiduciary responsibility that trustees of retirement funds carry, how much should they know about investments?
This is particularly important in the defined contribution environment, where members carry the investment risk and can no longer rely on their employer to make up any shortfall when they reach retirement age.
Robert Macdonald, head of Xchange Solutions, believes that trustees should take cognisance of five truths when reviewing their investment strategies:
l The future is always uncertain.
Not only should trustees not be asking such questions as: What is going to happen to the rand? or Is the price of gold going to rise or fall? but they should be on their guard whenever one of their investment experts predicts what is going to happen in the future.
l By accepting that investing is a means to an end, trustees should be aware that the focus of their investment strategy should simply be on meeting the needs of their members, and not be concerned about the performance of other retirement funds or other asset managers.
Trustees should ensure that asset managers are acting in accordance with mandates designed to meet those needs.
l Trustees should not pay attention to market commentaries, which invariably explain historical activities and present information in a way that often implies that such explanations were anticipated.
l Life staging has parallels to risk profiling, because it implies that as people get older they should invest in more conservative portfolios.
The reality is that two investors of exactly the same age can have very different investment needs, and consequently cannot be labelled narrowly, either with respect to risk profile or life stage.
"Investment risk is, however, something different. For example, we can quantify the likely risk of investing in different asset classes, and trustees can make decisions based on the risk of the investment, rather than on their own risk profile or that of their members," Macdonald said.
l Past performance is not an indicator of future performance.
This is probably the most consistent message that the investment industry communicates, but it is the one that does not seem to get through to investors.
Hence trustees will often make decisions about hiring and firing asset managers based on past performance, usually short-term relative performance, rather than on whether the needs of their fund are being met, or whether the managers are acting in accordance with their investment mandate.