What to do when unit trusts tank?

• Many managers advise gritting your teeth and sitting tight, despite Morningstar reporting that some funds now have negative five-year returns

Be prepared — the numbers in your unit trust or retirement annuity investment statement for this past quarter will be shocking, writes Laura du Preez on today’s Money page.

Be prepared — the numbers in your unit trust or retirement annuity investment statement for this past quarter will be shocking.

Almost every asset class is showing severe losses for the quarter, and asset managers are calling March an unprecedented month for investments as concerns about the effect of the coronavirus on economies around the world spread.

Statements will reflect large rand amounts wiped out as funds have recorded losses of 15%-20% over the past quarter, depending on how much you had saved and where you were invested.

The losses shown in the latest Morningstar performance report are so deep that some funds now have negative fiveyear returns.

In addition to large losses, global and local economic news is bleak, with dire warnings about declines in GDP growth. The lockdowns are a severe blow, particularly in SA, where the economy has already been struggling for a few years. Some companies will go under, unemployment will rise and company profits will be lower.

There is also uncertainty about how the country’s credit rating downgrade by Moody’s Investors Service and later Fitch Ratings will hit the local bond market. It is not clear how many investors have already sold SA bonds, how many more will do so and whether there may even be some new buyers.

The information is enough to spook even experienced investors. But your investment losses are only losses if you lock them in by withdrawing or changing your investment strategy before the markets recover. Most asset managers agree it is impossible to say how long it will take for markets to recover, but they expect they will — as they have after every crisis in the past, even if it takes longer this time.

PAPER LOSSES

They argue that the best thing you can do if you have the time is to stay invested and wait for your investment to improve with the markets.

There are many good businesses in SA and abroad that will get through the tough times ahead, says Anet Ahern, CEO of PSG Asset Management.

Many have cut costs aggressively and will expand their market share. This, in conjunction with their extraordinarily low share prices, provides fertile ground for longterm returns, she says. Falling prey to fear and selling your investments at the current low levels means realising what are now paper losses, Ahern says.

Though it may be extremely difficult to do so, now is the time to review how your investments are allocated to the different asset classes. The market losses will have upset the allocation balance and you should replenish your riskier assets judiciously over time to ensure you still have the appropriate long-term asset allocation, Ahern says.

“This is more constructive than reacting to the wide range of predictions that are out there at present, most of which will likely turn out to be wrong, and some of which will turn out to be reflected in asset prices already,” she says.

Clive Eggers, the head of investment analytics at wealth and financial advisory business GTC, agrees that markets remain volatile and the crisis is far from over, but there are opportunities for some businesses and, by extension, investors, There are risks, so managers need to carefully analyse which companies will be negatively affected by the coronavirus and which may emerge unscathed, he says.

It might feel painful but resist the urge to do anything drastic. It is the right thing to do if you are in the right investment strategy, says Andrew Davison, head of advice at Old Mutual

Corporate. He says a market fall of this magnitude is actually good for younger investors saving for long-term goals such as retirement, and it can improve the pension you receive in retirement.

If you are saving for retirement, you need average annual returns that are five or six percentage points above inflation, he says. But you shouldn’t expect it every year and certainly not right now.

But as stocks and bond prices are attractive, it bodes well for good returns and achieving the long-term averages in future, he says.

Steven Nathan, CEO at 10X, says it is impossible to answer investors asking if they should move from a high-equity multiasset fund to a low-equity one, because no-one knows exactly where markets are going over the short term.

In principle, this is not a good idea, because you have to make two decisions you could get wrong: when to get out of equities and when to get back in. Most people who try to time the markets get it wrong and end up poorer, he says.

Nathan says your aim should be to maximise your investments by the time you retire and not in the short term.

If you are retiring now, you are in the eye of the storm,

Davison says. If you move into cash now, however, you will lock in your losses.

If you plan to use investments in a living annuity to provide your pension, rather put your money back in the market in the same strategy you were in before retirement and draw as little as possible as a pension, he says.

Each monthly pension withdrawal while the markets are down locks in losses because that part of your savings has not had time to recover.

RETURNS RISK

When returns are poor in your first five years of retirement and you continue to draw a high income, you are most at risk of permanently damaging your savings’ ability to support your income through retirement. This is known as sequence of returns risk.

“If current market conditions persist for 12 months and markets then recover to precrash levels, pensioners are likely to run out of money four years earlier than under normal investment conditions,” says Deane Moore, the CEO of annuity provider Just.

He says the good news for pensioners is that the cost of purchasing a guaranteed income for life has gone down by almost as much as the fall in the value of balanced portfolios.

Alexander Forbes head of client solutions John Anderson says if you are retiring now you should consider a with-profits annuity as the guaranteed income these products offer has improved and you may share in some of the market recovery.

Both Moore and Anderson recommend using enough of your retirement savings to buy a guaranteed annuity that secures your monthly essentials such as food, accommodation, utilities, transport and insurance.

Any remaining capital can be invested for discretionary spending or to leave as a legacy, depending on how markets perform.

If you have other sources of income or can keep working, consider delaying your retirement.

If your investment values are depressed, you are entitled to leave it in your retirement fund to recover. You can become what is known as a paid-up member, Nathan says.

Your decision should take into account how much your investments declined during the fall, whether you plan to buy a guaranteed or living annuity and if you plan to live on investments, that your investment horizon could be as long as 30 years, Nathan says.