A lot of the time, people wonder why their pension account balances fluctuate up and down. One of the major causes of such drastic fluctuations is due to the performance of the traded equities or stocks in the portfolio of your retirement pension fund.
This is because a major bunch of the pension assets is usually invested in publicly listed equities on the stock exchange. These equities are traded on a daily basis and the result of the trading changes the prices of these equities either positively or negatively for the fund. It is positive if the equities prices continue to appreciate while it is bad news for the pension funds if it is otherwise.
The pension fund portfolio comprises of various types of investment products such as money market instruments (FDs, CPs, BAs), government securities (Tbills, Govt Bonds), Corporate Bonds, Mutual funds, equities, real estate investment properties, etc.
While some of these investment instruments earn returns on fixed terms, some earn income on variables terms. This means that, the performance of the instruments whose earnings are not fixed will ultimately either drag the fund up or down in their direction depending on their overall weight in the entire fund portfolio.
Consider an example below where in a particular fund comprising of the following as at the close of business on a particular day you have the following:
Money market instruments – #30k
Other Fixed income earning instruments – #50k
Variable instrument – equities – #69.85k
Total portfolio value – #149.85k
Fund unit price #1.1100
Available Units in Fund – 135,000
At the end of second day, however, the value has changed to the following:
Scenario 1
Money market instruments – #32k
Other Fixed income earning instruments – #58k
Variable instrument – equities – #40k
Total portfolio value – #130k
Available units in Fund – 135,000
Fund unit price #0.9630
Scenario 2
Money market instruments – #32k
Other Fixed income earning instruments – #58k
Variable instrument – equities – #75k
Total portfolio value – #165k
Available units in fund – 135,000
Fund unit price #1.2222
You’d notice how the fund price was affected both downward and upward respectively in both scenarios. It highlights the effect of the performance of equities on the pension fund valuation.
The Upside
The effect of equities can greatly affects the fund performance positively in times of positive trading. Looking at our scenario 2 above, you can see the positive effect the equities valuation contributed to the total portfolio value (10.11%). From experience, when a streak of positive performance by the stock exchange continues, be sure that the performance of your pension fund will be great as the pension fund portfolios hold a considerable value of equity instrument.
The Downside
Just as it is in the positive side, the exact mirror effect happens on the downside when the performance of the stock exchange returns a negative run. In our scenario above, the effect of the poor performance of equity instruments alone, accounts for the loss in portfolio value of #19.85 representing a 13.24% drop in portfolio value. Such is the typical effect of a negative stock exchange performance has on your pension fund portfolio.
Conclusion
In conclusion, there’s really nothing you can do about this in the short term. It is generally believed that over the years, the pension fund portfolio will recover it’s losses and ultimately cushion the effects of the fluctuation in the stock exchange through dividend receipt, the combination of various investment bouquets and the application of professional investment management techniques which the pension fund managers usually deploy in managing the pension fund portfolios.
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