THE LA RETIREMENT FUND (The Fund) INVESTMENT POLICY STATEMENT SUMMARY

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1 THE LA RETIREMENT FUND (The Fund) INVESTMENT POLICY STATEMENT SUMMARY Last updated April 2017

2 1. INTRODUCTION This Investment Policy Statement ( IPS ) is a formal statement of the main principles underlying the long term investment policy of the LA Retirement Fund ( the Fund ). It is intended to provide a dynamic framework for long-term investment decisions taken by the Fund s Board of Trustees and the selected investment managers. While the investment managers may in most cases have complete discretion in the acquisition or disposal of any type of long-term investment, subject to the terms of their mandates, the Board of Trustees expects such decisions to be taken within the framework of the IPS. The performance of the investment managers is evaluated relative to the considerations herein. 2. BACKGROUND OF THE FUND The Fund is a Defined Contribution ( DC ) Fund. The first component of the DC Fund was established in July 2011 when a Moderate Risk Profiled Solution was implemented. Life Stage investing was introduced in the DC section with effect from 1 August 2014 and all members have been invested according to this new structure. Flexibility is also provided allowing members to select either one of the two phases in the Life Stage Portfolio as well as a Cash Plus, a Preservation portfolio and a Shari ah Balanced Fund option. Life Stage investing is an investment strategy that attempts to provide an appropriate balance of risk and expected return at different stages in a member s working life. The retirement savings are invested according to each member s investment horizon (i.e. how many years left until their normal retirement date). The Fund introduced the Life Stage Programme to Provide members with a cost effective retirement savings mechanism; Protect and enhance where possible, members retirement benefits against the effect of inflation, based on calculated and acceptable risk levels; Provide members closer to retirement with an appropriate mechanism to meet their retirement needs. The Life Stage Programme enables members to have access to mandates / funds managed by top investment managers which are identified through a rigorous quantitative and qualitative due diligence process. The Board of Trustees also started investigating a viable In-Fund living annuity option in 2014 in line with National Treasury s retirement reform requirements. Analysis of the retirement behaviour of members showed that a fair number of retiring members annuitise a part of their retirement benefit. A suitable, cost-effective and prudent in-fund living annuity option was implemented with effect from 1 July

3 3. PRIMARY INVESTMENT GOALS OF THE FUND The Trustees have a fiduciary duty to invest the Fund s assets for the benefit of members in a responsible and prudent manner. For this purpose the Board of Trustees relies on the expertise of the Fund s investment advisors. Overall, the Board of Trustees has the following as its primary investment objectives: provide a competitive long-term real return taking into account appropriate and acceptable risk levels and costs; give appropriate consideration to any factor which may materially affect the sustainable longterm performance, including Environmental, Social and Governance (ESG) considerations; protect and enhance where possible, members retirement benefits against the effect of inflation, based on calculated and acceptable risk levels; provide members closer to retirement with an appropriate mechanism to meet their retirement needs and remain financially sound at all times. The Fund aims to maintain adequate diversification across asset classes, investment strategies and investment portfolios. The Fund therefore provides the appointed investment managers with discretion to manage the assets to meet these objectives within the constraints as per Regulation 28 of the Pension Funds Act on an individual member level. 4. INVESTMENT STRATEGY The Life Stage Programme ensures that investments automatically move from an aggressive growth strategy to a conservative strategy as members get closer to their normal retirement age, in turn, satisfying their investment needs. With effect from 1 July 2016, members automatically move from the growth strategy to a moderate strategy within 5 years of their normal retirement age in order to align the investment of their Member Shares with the required longer term investment strategy associated with the Fund s in-fund living annuity. The Fund s Preservation Phase (i.e. the conservative investment strategy) has been retained as an option for members not wanting to be part of the Life Stage Programme. A Cash Plus Solution is also offered for members close to retirement who wish to preserve their capital and who wish to opt out of the Life Stage Programme. With effect from 1 July 2016, members participating in the default Life Stage Programme are automatically moved through the following two phases as they approach their normal retirement age: Accumulation Phase - up to 5 years before normal retirement age Consolidation Phase - within 5 years before normal retirement age The phasing process is automated and is handled by the Fund Administrator so no actions are required from members. 3

4 Risk Profiled Solution Accumulation Phase Target CPI+6% (Net of Fees) over five year rolling periods with no cognisance of capital protection over shorter periods Peer Group GraySwan Balanced Fund Average and / or GraySwan Global Absolute Return CPI +5% to 7% Average Consolidation Phase CPI+4% (Net of Fees) over three year rolling periods with cognisance of capital protection over any twenty-four month rolling periods GraySwan Global Absolute Return CPI + 4% to 5% Average The Preservation Portfolio is no longer part of the Life Stage investment strategy from 1 July 2016 but may be chosen by members opting out of the Life Stage investment strategy. Preservation Portfolio CPI+2% (Net of Fees) over three year rolling periods with cognisance of capital protection over any twelve month rolling period GraySwan Global Absolute Return CPI + 2% to 3% Average A Cash Plus Solution is also offered for members close to retirement who wish to preserve their capital and wish to opt out of the Life Stage Programme. Cash Plus Option STeFI+1% (Net of Fees) over twelve month rolling periods with cognisance of capital protection over any six month rolling period GraySwan Money Market Average / GraySwan Enhanced Money Market Average A Shari ah Compliant Balanced Fund portfolio is also offered for members who wish to opt out of the Life Stage investment strategy and who wish to invest in a single manager, stand alone, Regulation 28 compliant fund. The fund is managed in accordance with Islamic investment principles and therefore does not invest in shares of companies whose core business includes the sale of alcohol, gambling, non-halaal foodstuffs or interest-bearing instruments. The risk profile of this portfolio is moderate aggressive and can therefore be compared to the Fund s Consolidation and the Accumulation portfolios. The Shari ah compliant portfolio s performance may be different to the performance of funds with similar investment objectives that do not subscribe to Islamic investment guidelines and may also be different to the performance of the mandates that are currently used by the DC and pensioner investment strategies as the latter two strategies do not adhere to or implement such restrictive criteria and a multiple manager approach is followed. 4

5 Shari ah Balanced Fund Option 45% Customised SA Shari ah Equity Index, 10% S&P Developed Markets Large and Mid-Cap Shari ah Index, 40% STeFI Composite 0.5% & 5% Threemonth US Dollar LIBOR over rolling 3-year periods. GraySwan Shari ah Balanced Fund Average Unitisation services and Regulation 28 compliance reporting have been implemented to facilitate the Life Stage Programme. 4.1 STRATEGIC ASSET ALLOCATION The long-term strategic asset allocation (SAA) sets the baseline weights per asset class required to produce the investment objectives within the risk tolerance of each of the Life Stage phases. The SAA is based on the long-term risk and return expectations of asset classes and does not take short-term market movements into account. The Fund is rebalanced periodically when the allocations deviate significantly from the SAA due to short-term market movements. 4.2 TACTICAL ASSET ALLOCATION Market movements and changes to investment managers may cause the Fund s allocation to move away from the SAA. This will require the Fund to rebalance back to the SAA. However, the Fund has implemented the services of a Tactical Asset Allocation (TAA) advisor in order to assist with advice with regards to such tactical decisions to deviate from the SAA as set out above in order to take advantage of short-term market movements for the benefit of members. 5. RESPONSIBLE INVESTMENT The core objective of Responsible Investment (RI) is to act in the best interests of the Fund s members by recognising that environmental, social and governance (ESG) factors can influence both investment risk and return, and must therefore be considered by the Trustees in all investment decisions. Protecting and enhancing financial returns by incorporating such factors is consistent with their fiduciary duty. The Fund s RI policy provides the Fund with a dynamic framework within which to make informed, prudent, long-term investment decisions taking into account both RI and ESG factors. The Fund is also a PRI signatory (United Nations backed Principles for Responsible Investment). The PRI provides a high-level framework for integrating ESG issues into investment decision-making and ownership practices within the boundary of the Board of Trustees fiduciary duties. 5

6 6. CONFLICTS OF INTERESTS In accordance with Circular PF No. 130 it is the fiduciary duty of the Board of Trustees and the Principal Officer to avoid (rather than manage) conflicts of interest. The Board not only deals with conflicts of interest amongst the members of the Board but also with respect to any service provider of the Fund. Conflicts of interest are avoided or removed and if not possible, resolved transparently. The Fund discloses how it manages conflicts of interest through its Conflicts of Interest Policy. 7. INVESTMENT PROCEDURES The Trustees, in consultation with the investment advisors, determine the Life Stage Programme as well as the construction of the various risk profiled solutions. The Trustees outsource the management of the assets to various investment managers who then manage specific investment portfolios on behalf of the Fund. The Trustees carry out the management of the risk profiled solutions and the Life Stage Programme on behalf of the members. The role of the Trustees is therefore to select investment managers / mandates / funds, to implement their mandates, to set benchmarks and targets and to manage the cash flows between the selected investment managers and finally to ensure that the investment managers complement each other to ensure adequate diversification within each constructed risk profiled solution. The Fund has for the purpose of the construction of the risk profiled solutions selected a range of investment managers / mandates / funds which includes the following: A mix of specialist asset class and multi asset class investment managers / mandates / funds; A mix of segregated and pooled mandates / funds; A mix of active and passive mandates / funds; Accessing mandates / funds via investment platforms; A Tactical Asset Allocation Advisor. 7.1 Specialist vs Multi asset class The Fund always considers specialist asset class and multi asset class investment managers / mandates / funds. The choice depends on the skill of the particular investment manager assessed as well as the availability of asset classes. 7.2 Segregated vs Pooled The Fund always considers segregated and pooled mandates to ensure the most cost effective and liquid way to access different investment managers / mandates / funds. Assets in a segregated mandate are held directly in the name of the Fund where the Fund is the sole investor in such a mandate. Assets in a pooled mandate are held in the name of the investment manager and the Fund is one of many investors in that mandate. 6

7 The Fund always considers the benefits and limitations of each approach on a case-by-case basis. Although the preference is for segregated mandates, there may be specific circumstances where it would be more appropriate to consider pooled mandates. Such circumstances may include: Asset size is not sufficient to justify a segregated mandate; To gain exposure to asset classes or instruments of a more specialist and/or illiquid nature; To gain exposure to international asset classes; To share the risk with other investors. 7.3 Active vs Passive The Fund always considers both active and passive mandates / funds to ensure the most cost effective and liquid way to access different asset classes / mandates. The goal of passive investment management or index tracking is to track or match the performance of a particular index. A passive mandate can therefore be used as a risk management tool in order to track an index or benchmark and reduce the volatility of expected returns around the index or benchmark. Due to the reduced input required by the investment manager, the investment management costs are usually less than for actively managed mandates. Active mandates may then be employed around the passive mandates with the goal of producing excess positive alpha above the index or benchmark, keeping in mind that this will come at an increased investment management cost and increased volatility around the index or benchmark. The investment management function has been outsourced to investment managers. Such investment managers are appointed with due regard being given to their investment style, philosophy, track record, financial strength and stability as well as their ability to meet specific investment objectives as set within their investment mandates. 7.4 Investment Platforms The Fund may access certain investment manager mandates / funds via investment platforms. These investment platforms conduct detailed operational due diligences on the investment managers and other related service providers to the investment manager or platform and provide administration and risk reporting services on behalf of the investment managers. The investment platform therefore provides an additional layer of operational risk monitoring and management as well as an extra layer of corporate governance. This is ideal for smaller and niche type investment managers such as hedge funds where operational risk is potentially the largest risk within the investment. 7.5 Tactical Asset Allocation (TAA) Advisor The Tactical Asset Allocation (TAA) advisor aims to provide TAA and hedging advice to empower the Fund to add value relative to the SAA of each Risk Profiled Solution over short, medium and long term periods. When appropriate, the Fund may provide the TAA advisor with discretion to 7

8 implement certain decisions and such discretion will be provided via a clear resolution from the Board of Trustees. 8. REVIEW OF THE IPS The Board of Trustees reviews the IPS on at least an annual basis or when there is a material change to the Fund or in anticipation of a major change. A material change to the Fund includes a significant change in the membership of the Fund or a significant change in the benefit structure or a significant change in the asset and / or liability values as a result of movement in the market or the transfer of assets and / or liabilities of the Fund. 8