Types of Retirement Fund Investments

The duty of a Board of Trustees of a Retirement Fund is to achieve the best possible returns on the assets of the Fund, bearing in mind the need for cash to pay withdrawing members and the risks that are inherent in any of the possible courses of action. There are many different forms of investment, with different levels of return, and different degrees of exposure to possible loss of capital. It is important to realise that there is no such thing as a "risk free investment". Even banks may fail, resulting in the loss of some or all of the assets invested in them. However, some categories of investment are, by their nature, more risky than others. For this reason, there is legislation which prescribes the way in which trustees of a Retirement Fund are allowed to invest its assets.

Investments which are normally associated with low risk are interest-bearing bank deposits. A bank will invest or loan out the money deposited at a profit, so in the long-run, this type of investment will provide a lower return than direct investing.

The ultimate source of all returns on capital is a profitable business. In order to maximise returns it is necessary to invest directly in such enterprises. It is not unusual for the highest returns to be associated with small companies whose shares are not quoted on stock exchanges, known as unlisted equities. Investment Funds in such businesses brings with it a higher risk of suffering loss through failure of the enterprise, as well as the difficulty of selling the investment when cash is needed. It is, therefore, common for Retirement Funds to mainly invest in equities (shares) which are quoted on a stock market. These are called listed equities.

There are various ways to gain exposure to equities, including direct purchase, and the use of so-called "derivatives" (futures and options). There are different risks associated with each category of exposure, and, of course, with each individual stock. In general, the greater potential there is for achieving a large profit, the greater the risk.

The risk arises from the fact that the immediate value of the investment will be determined by the currently prevailing stock prices. Unfortunately, such prices can be extremely unpredictable, rising and falling with fads and fashion, political sentiment, and world events. While such influences can produce major short-term fluctuations, such short-term effects often have very little to do with the basic worth of an investment, so in the longer term, their impact tends not to be of major significance.

A prudent Board of Trustees of a Retirement Fund must, therefore, mandate the Fund's Asset Managers so that they are able to invest a fair proportion of the Fund's assets in equities, for the simple reason that over the long term, this type of investment has provided the best return and is likely to continue to do so in the future.

To offset the volatility that is inherent in the pricing of equities many Retirement Funds invest substantial proportions of their total assets in bonds. Bond values also fluctuate but they behave differently from equity prices as the values of bonds are governed by different factors. The value of a long-term 12% per year government bond that promised to pay interest of 1% of its face value to the bond-holder every month depends on the interest rate at any time. For example, if the prevailing interest rate fell to 6% per year, double the capital would be needed to obtain the same monthly return. Under such conditions, the market price of the bond could almost double.


Asset Categories

Retirement Funds invest their assets in three major asset types:

Equities, Bonds and Cash.


Each asset class can be volatile (producing very high returns, very low returns, or in some cases, even negative returns). Equities are the most volatile asset class, and consequently are the most risky short-term asset class. Cash is the least volatile asset class and is the safest short-term asset class. In the long-term, however, equities are the asset class most likely to provide a long term real (after inflation) gain, while a cash investment is the least likely to provide a real return.

The task of the asset manager is to balance the investment mix to match both the short-term and the long-term commitments of the client.


A listed company (on the stock exchange) will raise money either by issuing shares or by borrowing money from a bank. The bank charges the company interest on the money borrowed. The company will only borrow the money if it can earn a greater return than the interest charges it must pay to the bank. If it did not, it would lose money and go out of business.

Hence, although investing in equities in the short-term may be risky, due to volatility, measurement of long-term returns (10 or more years) confirms that equities are the best performing asset class.

The Fund's appointed asset managers have full discretion to manage the assets in the manner that they believe will produce the best returns. They should manage the risk to match the requirements of the Fund, taking into account the prevailing market conditions in deciding on the asset mix and the specific investments. They will not always be able to avoid negative short-term returns, but periods of negative returns are often followed by good returns.

Portfolios managed on this basis are called balanced portfolios (the total assets being spread across the various asset classes in appropriate percentages given the market conditions).

Members of the University of KwaZulu-Natal Retirement Fund within 5 years of retirement are given the option of transferring their accumulated fund credit to a lower risk portfolio. These portfolios have a lower equity component and hence will reflect less volatility, but are also in the long run likely to offer level returns.


The investment strategy of the University of KwaZulu-Natal Retirement Fund attempts to provide optimal investment outcomes for its membership as a whole. Clearly, as members in different circumstances have different and sometimes conflicting needs and demands, it is not possible, simultaneously, to satisfy each individual member.

If you are over 55 years old please also read the document setting out your pre-retirement options.




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