Over recent days, there have been a number of important developments in financial markets that have caused significant falls in equity markets and high levels of volatility. On Sunday 14 September, Lehman Brothers, a US Investment Bank, filed for bankruptcy, as it was unable to raise sufficient capital to offset losses, while Merrill Lynch agreed to be taken over by the Bank of America.
In addition to these investment bank events, the American International Group (AIG), the world’s largest insurer, appeared to be headed for bankruptcy as well. It had significant difficulty in raising capital and was downgraded by the ratings agency Standard and Poor’s. In response to the potential bankruptcy of AIG, the US Government has provided an US$85 billion loan to AIG and will take an 80% equity stake in the company. The loan has been provided to avoid the bankruptcy of AIG and limit the potential impacts on global financial markets and economies.
In anticipation of the greatly increased volatility and significant falls in share markets around the world, central banks took further significant steps to increase liquidity in financial markets over recent days.
The outlook for financial markets remains unclear. Over the near-term, further volatility appears likely. While recent events are a reminder that financial markets can experience periods of significant stress, a focus on the long-term is the best strategy for achieving member objectives.
In Westscheme’s default option, the Trustee’s Selection, a two-portfolio strategy is employed with the aim of providing favourable absolute returns over the long-term, as well as defensive characteristics. In particular, the defensive characteristics are underpinned by returns from the Target Return Portfolio (TRP) which tend to have a low correlation with listed equity returns and be dominated by long-term and relatively stable cash flows. The defensive characteristics of the TRP assets (such as infrastructure and direct property) are expected to reduce the impact of weak equity markets on the performance of the Trustee’s Selection.
Howard Rosario
Chief Executive
Thursday 18 September 2008