The Board’s investment objective is to:
- deliver investment returns that enables the Board to credit members’ contribution balances with crediting rates that protects the value of their contributions’ over their membership term. Since the membership of a member can go from twenty five to thirty years, the investment horizon of the Board therefore is long term, and the core strategy is to buy and hold,
- the returns from Investments Portfolio must meet all the Fund’s costs and importantly to deliver crediting ratesto members’ contribution balances above the domestic’ inflation rate. In forecasting future returns, the Board and management are mindful of their trusteeship responsibility and fully understand and appreciate that the past performance and statistics do not guarantee future performance.
Understanding Investment Risks and Returns
Return is the level of profit or loss generated by an investment and represents the reward for making that investment. It makes no difference whether this has been generated by interest, rental, or dividend, realized capital gains/losses or unrealized capital gains/losses for our listed offshore equities, and realized and unrealized foreign exchange gains or losses. Risk, on the other hand, is the failure to achieve the desired or projected rate of return on an investment or on SINPFB portfolio of investments. The Board and management have always kept in balance, one of the main rules of investments, that the higher the potential reward, the higher the risk of losing money. And also they have kept in mind of the reverse, the lower the risk the lower the potential return. Some risks that need mitigation against include: currencies, markets, sectors or industries, company specifics, and credit risks.
Strategic Asset Allocation
In managing the various risks from investments, in order to protect member contribution balances against capital losses and secure enhanced returns on their retirement savings, the Board relied on its strategic asset allocation model, which it had approved in September 2007. The asset allocation model enabled the board to invest its funds across different asset classes, markets, and currencies. The approved strategic asset allocation by risk categories, subject to review from time to time, are as follow:
- low risk low return investment asset class – thirty seven per cent (37%),
- medium risk medium return investment asset class – twenty eight per cent (28%), and
- high risk high return investment asset class – thirty five per cent (35%).
Due to exchange rate volatility, offshore cash and fixed term deposits are classified as medium risk medium return assets. The asset allocation guidelines remained unchanged during the year.
Typical low risk low return investment assets are: on shore cash and fixed term deposits, and government securities. Typical medium risk medium return investment assets are: offshore cash and fixed term deposits, loans, bonds, and properties, and high risk high return investment assets are shares and equities, in particular in unlisted companies.
The market listing guidelines remain the same, with seventy per cent (70%) of the gross investment portfolio to be invested domestically, and thirty per cent (30%) to be invested offshore financial markets in the USA, Australia, Europe, and Papua New Guinea and in their currencies. Target currency exposure guideline for the US dollar is 11%, PNG Kina 7%, AUD 6%, Euro 4%, and GBP 2%. These limits are subject to periodic review. This currency allocation provides a “natural” hedge against exchange rate fluctuations. Investing offshore diversifies the risk that if the Solomon Islands’ economy performs badly then our exposures in other markets will mitigate our domestic losses.