Smoothing out retirement returns - a lesson from the Steinhof collapse

By Janice Roberts

Hugh Hacking, Head of Old Mutual Corporate Consultants

The sudden devaluation of Steinhoff – one of the 15 largest companies listed on the JSE – highlights the need for retirement assets to be sufficiently diversified. With enough diversification, even if a fund manager were overweight on this share, the impact on the total fund would be limited.

Hugh Hacking, General Manager Operations Old Mutual Corporate, says that volatility, irrespective of its cause, is to be expected from equity investments, which is why they are viewed as longer-term investments.

“South African investors have been faced with a volatile investment year, and many investors may fall into the ‘fear’ trap of losing some of their investment value during a period of heightened volatility. Steinhoff’s loss must be viewed alongside the strong equity performance most investors have experienced over the past few months.”

Hacking says that one way investors can protect themselves from the short-term volatility and uncertainty that often characterises equity markets is to invest in a Smoothed Bonus Fund. “As the name suggests, funds based on the smoothed bonus principle are specifically engineered to smooth out the ups and downs of market performance in the long term. Doing so results in a far less stressful investment experience, thus removing the temptation to react emotionally to external forces – whether these are positive or negative.”

Hacking explains that the key to securing long-term investment growth is to invest a reasonable portion of your portfolio in growth assets. “Unfortunately, while these assets have the best potential to deliver the growth you need, they are also riskier than other asset classes and more susceptible to negative performance when the markets turn downward.

“Smoothed Bonus Funds are designed to overcome this volatility by giving investors a good chance of enjoying reasonable growth, with much lower risk of potentially losing value during periods of poor market performance. In effect, the smoothed bonus approach addresses the concerns of members who are unsure of what the market conditions might be when they retire (or resign or are retrenched) by smoothing the market returns and providing a level of capital guarantee,” says Hacking.

Typically, the higher the guarantee level and the riskier the underlying investment strategy, the higher the associated guarantee fee. However, Hacking ensures that there are products available to meet all customers’ needs. “Seeing that Smoothed Bonus products offer different levels of guarantees as well as various underlying investment strategies, there is a Smoothed Bonus Fund product to suit the needs of every investor.”

While most Regulation 28 compliant funds are sufficiently diversified for long-term investors, Hacking highlights that investors should still be aware that investing in equities always carries volatility risk.  Individual investors with a low tolerance for risk should consider alternative investment strategies.

Importantly, he adds, investors don’t have to sacrifice capital growth to benefit from this smoother long-term performance. “This is because Smoothed Bonus portfolios still invest in an optimal range of growth assets such as equities, bonds, property and alternative assets, maximising the potential for them to deliver targeted real returns over the long term.”

This balanced growth approach is then overlaid with a smoothing process that sets aside a portion of the returns earned during the good times, to offset any market dips. These “invested” returns are then passed on to investors by means of a regular bonus.

“There’s a clear reason why these funds have been around for the past five decades and are the ideal fund for members looking to secure their retirement. It’s simply that the well-run versions of these products have delivered what they promise – smooth and stable long-term returns that offer a combination of inflation-beating growth with value protection during market downturns.”

Hacking says that adding to the appeal of the proven smoothed returns approach is a range of flexible guarantees. “The guarantees effectively lock in the accumulated value of the investment, and the growth it achieves, at an agreed level, thereby ensuring that investors in these portfolios need never worry about a market catastrophe wiping out some, or all, of their retirement savings.”

Reiterating the lesson to be learnt from the Steinhoff debacle, Hacking concludes that investors need to expect volatility when investing in equities. “If you need the growth that equities provide but don’t have an appetite for volatility, then a Smoothed Bonus Fund is a good option.”


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