eBusiness Weekly
Kudzanai Sharara
With the country’s inflation having reached 5,39 percent in September 2018, investors and trustees for pension funds should be more concerned with managing risk than performance, a Zimbabwe Association of Pension Funds Inaugural Convention for Principals Officers and Chairpersons of Boards of Trustees heard last week.
Rising inflation often evoke bad memories for pension funds and other investment vehicles as investors lost substantial savings and funds invested in money market and fixed income instruments during the hyperinflation era.
While there are doubts the country is heading towards another hyperinflation period, experts believe, fund managers must take all necessary measures to mitigate risks.
According to Intellego Investment Consultants Managing Consultant, Welcome Mavingire, chances of a 2008 repeat are very slim as fundamentals on the ground are different.
The hyperinflation period, which was fully blown in 2008, started in the late 90s with the inflation rate for 1998 at 48 percent and this is not the case at the moment with inflation still in single digits, said Mavingire.
“We are still way below the definition of hyperinflation, but the biggest issue is self-fulfilling prophecy which is fuelling price hikes with rates spiralling.”
Mavingire, however, said the biggest issue that resulted in most pension funds losing money is that most of the invested funds were invested in monetary assets.
He said returns on fixed income instruments, which most were invested in then, did not move in line with inflation resulting in value erosion.
Another important fundamental which was prevailing then is that prescribed assets rules restricted fund managers to invest in bonds and also at a higher level of approximately 45 percent.
This is no longer the case as it has been reduced to 10 percent allowing fund managers to invest in other assets and avoid fixed assets.
In a presentation on How to Manage Fund Managers’ Performance Effectively, Mavingire said the most important thing for fund managers is to identify key investment risks as well as possible mitigation measures and performance will fall into place.
Mavingire said chances of pension funds suffering similar fate as in 2008 are slim as there is now more regulatory oversight coupled with improved governance and Trustee oversight.
While Trustees back then did not care or understand much about investments, current Trustees are more active and knowledgeable as the regulator, IPEC, now require certain qualifications.
There is also increased exposure to non-monetary assets, which again cushion against heavy losses as in the past.
Mavingire, however, said more still needs to be done for pension funds not to suffer similar fate as in the past.
There is need for active risk monitoring and hedging, said Mavingire adding that instead of looking at individual asset risk, it is more critical to focus on overall portfolio risk and diversification.
“Trustees should now be in a position to look at risk, every time they are meeting, to look at what risk are they exposed to, if its inflation, how do you mitigate that risk. This means they will now need to be proactive that reactive,” said Mavingire.
“The whole essence of risk management is to look at the risk that you are likely to face, you try to quantify them and then you say what mitigation action can I take now instead of waiting.”
Mavhingire, however, pointed out there are limited investment options in the local market and called for introduction of more flexible products.
“If you look at the available products, there is are disadvantages, as it is restrictive. If you want to invest in property for example, one disadvantage is that
it requires a lot of money and also
illiquid.
He said if derivatives, ETFs, REITs are to be introduced, it will be easier for pension funds to liquidate and pay benefits.
