By Vimal Chagan, Divisional Executive for Investments at Liberty
Anyone who has been in the trenches of investing long enough will tell you that frightening market slumps are inevitable, as is long-term growth. One real hedge against these savings potholes are insurance-based investment strategies that provide a guarantee against excess downside volatility, protecting clients against the dips, but allowing them to fully benefit from market gains.
Would it therefore not be ideal to participate in the rollercoaster’s climbs, but have some sort of protection against those frightening downward sections? Especially when you are drawing down for an income whilst in one of those slumps.
Volatility, the extent to which an investment rises and falls due to market changes, is part of the course, but understandably daunting. Having a highwater-mark guarantee is a way to control this.
This is something that ordinary investment strategies don’t normally offer.
Making the choice
So ideally how should financial services providers – whether licensed insurers, asset managers or wealth managers – be managing their clients’ funds?
Living annuities remain the firm favourite in the South African market. Statistics from the Association for Savings and Investments (ASISA) for the period January to June 2020 shows that only 8 856 life or guaranteed annuities were purchased, in comparison to 22 000 living annuities – a 29% to 71% split. It has been shown that living annuities keep pipping guaranteed annuities at the post.
Whether the choice of living annuity vs guaranteed annuity is purely driven by a retiree’s urge for more control, going it alone is never ideal and is, quite frankly, probably terrifying for most clients. Lifecycle-specific goal-based advice is vital to support investors making decisions on drawdown rates or investment direction.
The risk decision
When faced with volatility and wanting to temper it, a client could choose to adjust his or her risk appetite and the risk-profile of all underlying investments to such an extent that the rollercoaster turns into a steam locomotive – chugging steadily towards its destination.
This will take care of volatility (that train won’t necessarily derail) but could cause a different type of risk where the client never reaches the financial destination that was originally planned.
Multi-strategy investment portfolios, for example, are actively managed and reviewed by professionals whose specific mandate it is to deliver performance during any market cycle. The five different approaches range from conservative (target of CPI+ 1 – 2% over 0 to 2 years) to aggressive (CPI +6% over 5+ years) and includes the client in a co-creation exercise to find the solution that matches their particular needs.
Insuring against the dips
For those invested in more aggressive portfolios pre- or post-retirement either through a retirement annuity or through a living annuity, a high-water mark guarantee provides a unique tool to protect against market slumps.
For an upfront fee of 1% of your investment lump sum, it protects 80% of the highest value that your investment reaches at each quarter end, over a five-year period. It also protects your income drawdown because if you are below the guaranteed level, part of your income will be paid for by that guarantee throughout the five-year period that it is in effect. There is an element of growth sharing in years when markets perform really well. If, at the end of five years, your investment is below the guaranteed level, your investment will get topped-up to that level.
In essence, it creates a rollercoaster where there are more ups than downs.
Ongoing goal-based advice is part of this evolution, this has become more important than ever in a world where people are living longer and attitudes toward retirement are changing. It is no longer a switch that is flipped, but rather a transition into a new phase of life that may realistically include a centenary birthday.
The multi-strategy model fits well into an approach where clients are provided with holistic lifecycle goals-based planning. Combining it with an offering like a high-water mark guarantee does offer peace of mind so the bumps of market volatility can be smoothed out, and the profits of a good upturn can be enjoyed.