WITH the assistance of investment advisers, trustees are in the best position and have the responsibility to understand the characteristics of their fund and set the objectives of the investment strategy.

Neil Lloyd, national head of retirement fund consulting at Alexander Forbes Financial Services, says this is an issue many trustees believe should rather be left to their asset managers or investment consultants.

"These objectives would not only be their retirement fund return targets, but should include some assessment of the risks the fund should accept particularly since the risk-return trade-off is key to any investment strategy.

"Only with a clear understanding of these investment objectives, and taking into account the expected return and volatility characteristics of the various asset classes, can trustees set a strategic asset allocation such as a mix of asset classes for a portfolio most likely to achieve the objectives identified initially."

Lloyd says that in reality asset managers are unlikely to appreciate fully their specific objectives for their fund. Such objectives would include their asset-liability profile and tolerance for risk.

Nor would they fully appreciate the specific requirements of their members/pensioners. As a result, trustees are less likely to set an asset allocation that is inappropriate to a specific fund.

"However, where trustees set a strategic asset allocation, mandates can still be given to the fund managers to deviate from that asset allocation, but within reasonable risk parameters.

"In such cases, fund managers will be expected to outperform the strategic asset allocation portfolio. Clearly tactical asset allocation, which is the up-weighting or down-weighting of asset classes, is a function that should be delegated to a suitably skilled asset manager, since this would not usually be the responsibility of the trustees."

On the issue of whether trustees are sufficiently qualified to set a strategic asset allocation, he says the answer in many cases may be negative. However, it is their responsibility. "In such cases, trustees not only need to seek expert advice, but must educate themselves so they are able to evaluate such advice," he says.

Oct 30 2003 07:16:42:000AM  Business Day 1st Edition