The Fund’s investment strategy is to invest according to a Life Stage model, whereby members are invested in a “Growth Portfolio” and then, as they approach retirement, they are switched through to lower risk portfolios until they end up in a “Conservative Portfolio”.
The idea behind this Life Stage Model strategy is that members need to be invested in portfolios that deliver growth above inflation over the longer term. These growth portfolios are by necessity invested in what we refer to as growth or risky assets. These include local and global shares and property.
Whilst these growth/ risky asset classes have historically delivered inflation beating returns in the long term (and are expected to continue to do so into the future) they come with the risk of volatility or negative returns in the short term.
The graph below shows that investing in growth assets can be volatile (with lots of ups and downs in the short term) but with substantially higher growth than other safer (less volatile) asset classes in the long term. We refer to this as the “eat well” vs “sleep well” dilemma:
- We can invest members in safer, less volatile bonds and cash and they will experience less volatility and steady growth and so they will sleep well at night. However, when they get to retirement, they will not have enough retirement savings to eat well.
- We prefer to invest members in the growth assets like property, shares and global assets that may experience volatility and losses in the short term (as they are now) and so they may not sleep well. However, when they get to retirement, they will have enough retirement savings to eat well.
Because of the significant benefit of investing in growth assets over the longer term, it is worth taking on the risk of negative returns in the short term to enjoy the benefit of being able to eat well.
So, a member who has a longer term investment time horizon is invested in the Growth Portfolio. When they approach retirement, they potentially no longer have a long term investment time horizon and so they are switched to portfolios with less exposure to growth assets. This protects them from short term losses.
Members also have access to a range of member choice portfolios, some of which come at an extra cost to the member, if the member feels they have a particular investment need that is not catered for in the Life Stage model.
Stick with your long term investment strategy to enjoy a better retirement
The Fund is investing in line with a well thought out long term investment strategy that has historically (and expected to do so in the future) delivered returns well in excess of inflation.
The current short term negativity is unfortunately the “price” (in terms of not being able to sleep well) that members need to pay in the short term in order to be able to “eat well” in the longer term (at retirement).
Members are encouraged to stick with the longer term strategy and avoid the temptation of switching to lower risk strategies in these times. Doing so usually leads to longer term losses due to missing out on the market recovery when it comes.
Queries
If you have any queries or concerns, you can contact the Fund’s advisors on queries@ofs.co.za and they will respond to you.