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Sagicor pension performance a drag on the market, but outlook positive

In a soft period for private pensions when portfolios declined, fund manager Sagicor Life Jamaica Limited turned out to be one of the big drags on the market’s performance last year.

As the largest pension fund manager, the insurance company closed 2022 with assets under management of $212 billion, down four per cent from $220 billion the year prior.

Comparatively, pension portfolios across the board dipped at a slower 1.42 per cent pace to $703 billion, which meant that Sagicor substantially underperformed the market last year.

Overall, pension fund portfolios shed $10 billion of their value, and Sagicor alone accounted for $8 billion of the industry rout.

Like others before her, Sagicor Group Jamaica’s Senior Vice-President for Group Treasury and Asset Management, Donnette Scarlett, pegged the performance of investment holdings to global headwinds, amid tight labour market conditions, a destabilised commodities market impacted by the Russian war against Ukraine, supply chain challenges, interest rate hikes by central banks to tame rising inflation, and capital market turbulence.

“As a result of these market movements and the tightening by central banks, most pension funds would have experienced a noticeable decline in value for the quarter ended September 30, 2022,” Scarlett said.

The company said the dip in funds under management was primarily due to increased asset price volatility, with most of the fallout happening in the first nine months of the year.

“Since October 2022, however, we see where bond values have been steadily improving, signalling a positive outlook for pension funds, as well as the rest of the market,” Scarlett noted.

“This is as a result of stabilising interest rates, as well as progressively improving economic conditions, especially in the local economy. We are optimistic about the performance of pension funds in the upcoming financial year,” she said.

In Jamaica and elsewhere, central banks have pulled back somewhat from their aggressive rate adjustments, adopting either a more measured pace or a holding pattern, but they continue to warn that more hikes are likely this year, due to the continued headwinds.

The central bank most watched by Jamaica and the one from which it generally takes its cues, the US Federal Reserve, affirmed again on Wednesday that it was likely to hike rates again, notwithstanding the fact that a week prior it had held its key rates steady.

Jamaica has held interest rates steady since last November, but it too has signalled that future hikes are not yet entirely off the table.

Alongside its role as top pension fund administrator, Sagicor Life Jamaica Limited is also the dominant provider of life insurance in Jamaica. It’s also the flagship operation of Sagicor Group Jamaica Limited, whose businesses also span investment banking, commercial banking, property management and hotel ownership.

Pension investment structures

Sagicor Life operates three pension investment structures: pooled funds, self-directed funds, and deposit administration.

It manages pension contributions on behalf of corporate clients that operate approved superannuation funds, as well as for individuals through an approved retirement scheme known as Sagicor Lifestyle.

Sagicor pensions are secured through the purchase of annuities. The remaining assets are invested in nine pooled funds, which are segregated from the assets of Sagicor Life Jamaica Limited and held under trust via Sagicor Pooled Investment Funds Limited.

“Experienced fund managers will appreciate that the market will go through cycles and have robust policies in place to protect pensioners for the long term, despite short-term disruptions in the market,” said Scarlett, adding that over time, the pension assets managed by Sagicor have been generating returns above inflation.

Last year end, annual inflation was measured at 9.4 per cent by Statin.

Sagicor said its top-performing pooled fund turned out to be the Pooled CPI, which is structured as a hedge against inflation, and generated annual returns of 9.9 per cent in 2022. The pooled mortgage and real estate fund generated a return of 6.3 per cent as the second-best performer.

“An analysis of the last 10 years – 2013 to 2022 – will show that despite the unprecedented economic shifts, all pooled funds managed by Sagicor Group Jamaica have grown above the average rate of inflation in the period,” said Scarlett.

“Some of our pooled funds saw average growth of up to 14 per cent, while inflation grew at an average of six per cent in the decade,” she added.

Multipronged approach

Sagicor Group has a multipronged approach in managing pension funds.

That includes investing in short-term leases, treasury bills, and other low-risk, fixed-income instruments that offer attractive yields, said Scarlett, adding that the pension administration unit has reduced the average time to maturity on the fixed-income portfolio by rebalancing from longer-dated bonds to one with shorter maturities.

Sagicor’s stance on equities has become more cautious, with the company adopting what Scarlett defined as “a top-down investment approach” aimed at identifying the sectors that are poised to outperform the market, as well as companies that provide consistent dividend flows.

It involves “holding more defensive stocks of companies with strong balance sheets”, she said.

In the real estate sector, the company has increased its exposure to commercial properties that provide stable long-term rental income and have the potential to gain in value.

“Our direct commercial real estate investments have seen an average annual return of 14.5 per cent over the last three years, and we expect to continue to see improvements in the return on this portfolio, driven by these assets,” alongside properties to which the pension fund manager has indirect exposure, Scarlett said.

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