Planned Lifestage portfolio changes on ice due to COVID-19 and Moody’s downgrade
In our previous Newsflash, we highlighted that the impact of the novel coronavirus (COVID-19) was being felt across both local and international markets. Economic activity around the globe slowed down dramatically, fuelling investor anxiety and resulting in even more financial market volatility. At the time, the plan was to continue with the proposed move of our Lifestage portfolios from riskier assets (local and offshore equity) to less volatile local fixed-income investments, such as flexible bonds and cash. This was based on the view that the changed portfolios would be better positioned to tackle market turbulence and minimise value-destruction.
THINGS HAVE CHANGED, AND SO SHOULD OUR PLANS
The worldwide COVID-19 pandemic has resulted in a global health crisis unlike any that we have ever witnessed. The last time we saw the value of equities falling this far, and quickly, was in 1987. In the case of this current market crash, the value lost has already been far greater, and the timeframe much shorter. Equities are however not the only asset class to be negatively impacted, with virtually all traditional investment classes such as property and bonds also being impacted.
In addition, international credit rating agency Moody’s recently downgraded South Africa’s long-term foreign and local currency credit ratings to sub-investment grade (junk status) on 27 March 2020. This means that foreign investors will find it even more unattractive to invest in South Africa. Although this downgrade was not unexpected, the impact of COVID-19 potentially fast-tracked Moody’s decision. This downgrade will unfortunately further increase the volatility in the local market over the next few weeks.
Under these very extreme circumstances, it is impossible to predict what asset classes will fare better or worse. As such, the Board of Trustees on recommendation from the Investment Board Committee and in consultation with the Fund Actuary and Asset Consultants, have agreed to postpone the rebalancing of the Lifestage portfolios until the volatility in the market lessens. We believe that this measure will also limit any unforeseen losses that may result from making asset allocation changes at this stage. The Fund will continue to keep you updated in this regard.
PLEASE HANG IN THERE
We understand that many of you may be worried about your own health and that of your loved ones during this time. Many of you may also be worried about the state of the global and South African economy, and the impact that will have on your retirement savings. However, please be very careful of making any hasty decisions at this point in time.
Research has shown that investment returns after market crashes are often more than the losses incurred during the crash. Investors who sell at the beginning of the crash usually experience significant losses – losses that they could have recovered if they remained invested until after the crash.
For long-term investors such as younger members, specifically, the gains experienced over the long term will outweigh the losses experienced in the short term.
We need to alert members that this may not the best time to retire or withdraw from the Fund, as your Fund Credit would have felt the effect of these investment losses. We therefore urge members not to consider early retirement, resignation, etc. at this time. For those approaching normal retirement age in 2020, see if there is a way to get by on other income, so that you can defer receiving a monthly pension from the Fund for some time. This should allow your Fund Credit to recover and grow with investment gains, hopefully making up for the losses resulting from the current market crash. Having said that, we encourage members to speak to a certified financial planner, to plan for their unique circumstances.
If you have urgent questions, please get in touch with us via email email@example.com, or call 053 807 3222. We request, however, that members limit contact during the lockdown period, as we will be attending to urgent queries and calls only.
PS: The Financial Sector Conduct Authority (FSCA) has just published a communication outlining their expectations regarding the culture and main responsibilities of financial institutions during the COVID-19 crisis. I am happy to report that we are already fully aligned with their guidelines. Our business continuity plans are in place and, although service may be in a different shape than before, we will continue to assist our members and pensioners to the best of our abilities during this lockdown period and throughout the crisis. More importantly, we understand that our members are also under undue stress at the moment and undertake to continue practising our Treating Customers Fairly (TCF) principles in assisting them, if anything, with even more empathy, flexibility and understanding during these difficult times.