Our broad approach in volatile markets.

Members will be well aware of the recent volatility in equity markets. It has become commonplace to see daily market moves of 2% to 3%, sometimes more, in either direction, although mainly down over the last few months. Furthermore, the moves can sometimes be attributed to nothing more than an announcement regarding the level of some fairly obscure economic indicator for a single month, or the collective decision of market participants to focus on an issue about which all of the key facts have been common knowledge for many months, even years. Developments in markets are newsworthy and there is no shortage of people with opinions on what is going to happen over the next month or two, indeed week or two or even tomorrow.

We thought that you, our members, might be interested to understand something about our broad investment approach in this environment. Firstly, as far as possible we avoid getting caught up in the short term noise of day-to-day market movements. There are of course many people who make a living out of predicting short term market movements, in some cases, a very good living, even if their predictions are inaccurate. And maybe some people can predict short term movements with some reliability.

However, we believe that as the investors of your retirement savings, our focus should be very clearly on the medium to long term periods that are relevant to you. So we set our strategy annually based on a view on the investment outlook over a medium term timeframe (3-5 years). Within the year, we review our position regularly, but by and large avoid making changes to our asset allocation unless we believe that there have been fundamental changes to the medium term outlook.

Within asset classes, the external managers who manage security selection on a day-to-day basis will always be adjusting the structure of their portfolios depending on the opportunities and risks which they see in the market.

The investment styles of our managers vary quite considerably by design. One or two of our managers could be regarded as quite active in terms of the rate at which they buy and sell individual securities. In the main, however, they also adopt a medium term approach in thinking about the structure of their portfolios and have lower turnover than many peers.

Another feature of our approach in recent times has been to seek out investments that are expected to deliver solid returns through most economic environments but without the exposure to market sentiment and/or economic growth inherent in listed equities. The dislocation in lending and other markets associated with the global financial crisis (GFC) of 2007-2009 has created opportunities to secure access to reliable cash flows at pricing which is considerably better than was possible through the years running up to the GFC.

Such opportunities often come with other drawbacks, frequently constraints on liquidity, and we will continue to maintain a healthy exposure to listed equities in Managed Choice options where this is consistent with the stated risk/return profile.

Nevertheless, debt reduction at both the personal and government level is likely to be a key theme for a number of years through much of the developed world, and this will represent a constraint on economic growth as well as creating uncertainty and volatility in markets. In this environment, we believe that it is worthwhile pursuing investments which offer stable and predictable returns.

Garrie Lette Chief Investment Officer Published September 2011