Market fluctuations amid the pandemic: what they mean and what measures we’ve taken to reduce the impact on pension funds

With the world’s financial markets experiencing marked volatility this past month, we share insights on the current situation in the markets and measures the managers of INVL pension funds have taken to reduce the impact of fluctuations on the value of the funds managed.

Vaidotas Rūkas, Chief Investment Officer at INVL Asset Management, comments:

Following an active rise during 2019, as news unfolded in late February this year about the spread of the coronavirus in China and Italy, the situation in the financial markets changed radically and remains extremely unstable still.

While the drop in the markets has also meant a reduction in the value of pension funds’ investments, we want to reassure you that volatility and equity markets are inseparable, and after a downturn, the value of shares typically returns to the previous level or even higher. Accumulation in pension funds takes place over decades, a length of time when there can certainly be fluctuations. Moreover, seeking the best long-term results, 2^nd pillar pension funds are managed on a life-cycle basis – their level of risk and the fluctuations in their value are reduced as participants age.

In overseeing long-term investments like pension accumulation, it’s important to recall that, to safeguard the value of investments, it’s important not to change a strategy or fund when its unit value is down. It’s also not advisable to reduce the size of investments at a “low point”, without waiting for it to return to the previous point.

When investing periodically, a downturn also offers opportunities, since, for instance, in transferring contributions to pension funds each month, buying is then at very low prices. The lower the price when buying, the bigger the gains will be when markets recover.

That’s all confirmed by the experience of the crises of 2002 and 2008. This graph of the value of the S&P 500 index, which includes the 500 main companies listed on U.S. stock exchanges, shows how the value of U.S. shares has varied since 1995 (in that period there were bigger crisis periods than now). Despite the fluctuations that occurred during the period, over 25 years the index’s average annual return was positive and amounted to 6.7 percent.

We aim to make sure that in managing pension funds’ investments, we actively monitor the situation and take the needed measures. Since the prices of riskier asset classes (shares, real estate) do and will fluctuate significantly, we’ve prepared for critical moments by analysing past market fluctuations well in advance of this market drop and we abide by these principles:

• First, we don’t know and don’t guess rises and falls in financial markets, but we act according to a predefined plan and strategy for how to behave in different market scenarios.
• Second, the key lesson of the crises is to not destroy value by avoiding situations where a significant part of a portfolio’s investments default or have no chance of recovery. That’s why we broadly diversified funds’ investments across the world’s companies, and most investments are in major companies in the world’s strongest countries – the USA, Western Europe and Japan. The value of these companies may temporarily fall, but the survival of the absolute majority of them is not at risk.
• Third, the investment plan foresees factors where, if they occur, the risky part of investments is reduced. Abiding by this point in the plan made it possible, in funds that contain shares, to soften the drop in value of the equity portfolio by about 2 percent as of 17 March this year. Every percent that’s saved will make it easier and faster to return to investment’s former value when the situation in the equity markets gets back to normal.
• INVL’s equity investments track a global index of equities, of which about one- fourth comprise shares of IT and telecommunication companies. The situation in the world opens big opportunities for these companies, since in conditions of quarantine, remote workplaces are using even more IT technologies and communication channels.
• In the bond markets, a reduction of liquidity is being felt and investors are delaying buying decisions even if bonds’ issuers have a high quality of credit. The bond portfolio we hold is diversified, which makes it possible to avoid dependence on one or several investments, so it is extremely important to have time to wait until the situation returns to normal and to avoid selling at unfavourable prices.

Our consultants are ready to answer any questions that may arise. We invite you to register for a remote consultation or call us at +370 700 55959.
Additional information: the graph shows the value of the S&P 500 index at monthly intervals priced in US dollars. Only the value of the index is shown, not including dividends. Accumulating in pension funds entails assuming investment risk – the value of a pension fund unit can both rise and fall. You may recover less than you invested. Past investment results do not guarantee the same results and profitability in future. More information about accumulation in pension funds, their rules, investment strategy, key information documents, risks associated with investing and applicable fees is available at www.invl.com.