Did you know that you already own shares in some of the largest companies in South Africa through the monthly contributions towards your retirement fund?
Whoa, how does my money reach the largest companies in South Africa, like Vodacom, Shoprite or Pepcor?
Yes, your company’s retirement fund pools the contributions of all staff. The fund then invests this large pool of money with an asset manager under a specific mandate. The mandate guides the asset manager to pursue expected returns, manage risks and invest into a portfolio of preferred asset classes, like equity (shares in companies), property or commodities.
Ata wants to know…
What is an asset manager?
An asset manager manages many different investors’ money, from an individual to a company’s retirement fund. In effect, an asset management company manages a giant pool of money!
In practice, an asset manager sets up an investment fund that invests in various asset classes, among others, equity, which includes trading in shares on the stock exchange.
The asset manager studies the market and the performance of various companies and decides which shares to buy or sell, considering their mandate and rules under which they operate.
Ata wants to know…
How does my retirement fund achieve returns on the stock exchange?
- A retirement fund is a very long-term investor. It generally holds on to shares in companies with the aim of increasing their value over time. As the value of the shares increase, so does the monetary worth of the retirement fund. Generally, the price of a share increases if the company is performing well and is also expected to make money in the future.
- By buying shares in companies that expand and perform well, the fund then gains from either receiving dividends when the company makes a profit or selling the share at a higher price than what it bought it for.
For example, let’s say an asset management company manages R100 million worth of investments from a retirement fund. It invests 50% in listed shares on the stock exchange, 20% in property, 20% in cash and 10% in commodities. The company buys R10 million worth of shares in Spur Corporation. Spur Corporation expands successfully into Africa and Spur’s share price increases by 15%. The investment in Spur has increased the retirement fund’s value by R1,5 million. In a similar way, other investments will either increase or reduce your retirement fund’s value.
In short: Your monthly contribution, if invested by good asset managers, can help companies to innovate and grow. This in turn can stimulate the economy and potentially create jobs and other economic opportunities, if done responsibly. At the same time, you earn a return that can increase your pension payout.
Ata wants to know…
Why can’t a retirement fund invest 100% of its money on the stock exchange?
Investing in shares can be risky. There could be no buyers for your shares (more prevalent with smaller companies or companies in distress), the listed company could go out of business, or returns received (through dividends and capital gains when shares are sold) could be lower than expected.
Regulation 28 of the Pension Funds Act stipulates that the underlying portfolios in investment funds are limited to exposures of 75% in listed equities.
An asset manager sets up a fund that spreads or diversifies risk by investing in more risky asset classes like equity and less risky asset classes such as money markets and government bonds.
If the shares in the companies are not producing the expected returns, or are making losses, the retirement fund’s money is balanced by the more stable returns on other asset classes such as government bonds and money markets.
Essentially, the retirement fund does not “have all its fruit coming from one tree”.