Regulation 28 reimagined: maximising returns and creating stability with alternative assets

by Michael Field and Jeanetta Hendricks | 28,Feb,2024 | Fedgroup, Q1 2024, Special Feature


In the dynamic world of institutional investments, a mastery of regulatory mazes is key to ensuring stability and growth. Enter Regulation 28, a pivotal force guiding institutional investors in strategically constructing retirement portfolios, ensuring sustainable investment practices. Yet, in an era where diversification reigns supreme, custodians of retirement funds have historically neglected the incorporation of alternative assets within this framework, missing out on the untapped potential of this promising asset class to fortify portfolios against volatile market conditions.

Regulation 28 of the Pension Funds Act delineates the boundaries of retirement fund investments. Yet, amid the defined limits within each category, many fund managers and trustees are still not aware of the potential of incorporating alternative assets into balanced portfolios that are capable of withstanding the tumult of unpredictable markets.

Amidst constraints within each category, constructing such portfolios becomes intricate. The allure of the tried-and-true beckons, but as the adage goes, familiarity breeds contempt. So, is this conventional approach truly in the best interest of fund members?

Alternative assets play a pivotal role in the portfolios of institutional investors, offering avenues for diversification beyond the traditional spectrum. Their potential benefits, including augmented returns and diminished correlation to conventional markets, position them as attractive options for institutions seeking to refine their investment strategies.

Despite historical scepticism surrounding alternative assets, painting them as riskier than traditional classes like equities, the reality is far more nuanced. While risk levels may vary, when incorporated in a prudent approach, these assets possess the potential to significantly curtail overall portfolio volatility. Often, alternative assets are not linked to market sentiment, this allows them to reduce portfolio volatility. Similarly when used strategically they can serve as a hedge against currency fluctuations and inflation, making them ideal considerations for retirement funds and the members who might be entering their twilight years. And it does all of this without the need to forego returns by switching to cash assets.

Much of the concern around alternative assets stems from a regulatory perspective and although this is a valid concern – we are working with the life savings of many individuals, after all – it is important to note that all alternative assets were not created equal and many often carry less risk than traditional assets. Crucially, alternative assets make up the majority of assets available in the market and they come in many different forms. There are other alternative assets besides the more well known hedge funds and derivatives, like those in the green energy or smart agriculture space. Familiar financial structures provide a conduit for the seamless incorporation of a variety of alternative assets, ensuring strict adherence to regulations. And we’re seeing this trend emerge through innovative strategies and structures that not only comply with regulatory standards but which also unlock the full potential of alternative assets within retirement portfolios.

By using prevalent, traditional structures such as insurance investment policies, providers can easily construct offerings that meet the exacting needs of investors and fund managers alike, while still ensuring the longevity of the invested funds. So, with an asset class boasting the potential to deliver substantial returns without taking investors on a turbulent journey that will leave them clutching at their chest every time they turn on the news, why do so few funds exploit its potential?

Success with alternative assets on this scale hinges on a collective understanding among stakeholders. Fund managers bear the ultimate responsibility for portfolio performance, while Trustees are answerable to the individuals relying on them to nurture their finances for their golden years. Although being able to justify a decision is important, Trustees and fund managers must fully consider the ramifications of disregarding an entire asset class and justify their decision to steer clear of this exciting, growing asset class to the members of the fund.

Because it is, ultimately, a decision. Not acting, or not investing in something is an active decision, whether on the part of the fund manager or the Trustees. And because both parties are responsible for ensuring that their members’ funds are invested responsibly and growing, it is key that they consistently review the performance of the fund and question the asset allocation within that portfolio to ensure that they are maximising each category allowance.

Measurements play an important role here. Beyond traditional measurements, such as growth (if you’ve been prudent in your approach to managing the fund), another important, and often overlooked, metric is volatility. Rather than just focusing on performance and risk, the amount of volatility a portfolio is exposed to is equally important when making more holistic decisions about where to allocate funds and how to access the assets. In this interconnected world we have seen increasing alignment between asset performance. This synchronisation is creating higher volatility in traditional asset classes, a phenomenon against which too few are guarding.

The world is constantly changing, and that change has been accelerated over the last few years. From how we work to how we shop, every aspect of our lives has changed. Surely how we invest should also follow suit? When you actively consider alternative assets, you find yourself exposed to so many more options than most people realise exist within the framework of Regulation 28.

As institutional investors navigate the intricate dance between Regulation 28 and alternative assets, strategic guidance becomes as paramount as asking the right questions. This includes offering advice on exploring alternative assets while adhering to regulations and dispelling common misconceptions or challenges that may arise in this complex terrain.

Institutional investors have a unique opportunity to optimise their portfolios by reimagining Regulation 28 and embracing alternative assets. Navigating compliance challenges, embracing innovative approaches, and staying ahead of regulatory trends are essential steps in unlocking the full potential of alternative assets within the institutional investment landscape. As the financial landscape evolves, the custodians of retirement funds must continue to adapt, finding the delicate balance between regulatory compliance and maximising returns.

Michael Field
General Manager of Investments at Fedgroup | + posts
Jeanetta Hendricks
General Manager of Care at Fedgroup | + posts