Rough with the smooth
The smoothed bonus fund has never been a favourite product of mine. It is insanely expensive, with a charge of up to 2.5% for the privilege of some stability in a portfolio — it is not as if an outright guarantee is provided in all circumstances. And when you need your investment most and cash in, you are often paid out far less than the nominal value of your units, through a device known as the market value adjustor. I will be deeply disappointed if the Financial Services Board allows life offices to offer smoothed bonus funds as the default portfolios for retirement funds.
So I suppose it was inevitable that self-proclaimed disrupter-in-chief and Sygnia CEO Magda Wierzycka would launch an artillery attack on smoothed bonus funds as we know them.
I hear her new catch phrase is:
“Don’t call me Ivana Trump.” These bright Eastern Europeans have a lot in common; just pray that the Trump family does not try disrupting the world with the artillery at its disposal.
The new Sygnia Stabilised Growth aims for a 5% real return over time.
The underlying building blocks for now are the in-house Signature 60 and Skeleton 60 portfolios, with a middleof-the-road 60% exposure to equities.
But Darryl Moodley, Sygnia’s head of investment consulting, says it is open to any ideas from larger clients who might prefer to use external portfolios.
He says that for a fund of about R2bn the fee for smoothing and related admin costs would be as low as 0.15%.
There is a certain amount of illusion to smoothed bonuses; they are designed to give peace of mind in the short term but don’t help long-term returns. In fact, the higher fees can erode returns sharply. And let’s face it — in retirement funds the long term is all that matters.
A monthly bonus is declared in the Sygnia fund and a portion of the investment returns is held back. These can be released in the weaker months, giving the illusion that the smoothed fund is producing far better returns than it is in fact doing in its underlying portfolio.
Moodley says this is a lot less expensive than the traditional capital-guarantee model. In that case a life office such as Old Mutual uses shareholders’ funds to fund the smoothed bonus product, and of course shareholders expect their return. Smoothed bonus is the main reason Old Mutual Corporate is so profitable. Even Sygnia won’t allow an entire employer group to leave the Stabilised Growth fund when markets are low and take the full book. I think that’s a legitimate business practice, but individuals at least who resign will not be subjected to a market value adjuster.
Going up over time
Moodley believes the traditional smoothed bonus funds are often structured so that the chances of a guarantee having to be exercised are extremely low. So why pay the high charges?
His colleague David Hufton even calls smoothed funds a triumph of marketing over reason. Certainly they appeal to an emotional, irrational part of the psyche. Moodley says it is impractical to rule out negative bonuses altogether. Nobody wants to lose money; but in investments almost no loss needs to be permanent. It might not seem that way in the midst of the Steinhoff disaster — which of course hit both active and index funds. But a well-diversified portfolio will go up over time.
It’s a sad reflection of the retirement fund industry that Sygnia’s interesting, but hardly mind-blowing, product should be considered disruptive. It’s not exactly Outsurance or Discovery medical aid. But full credit for restarting the smoothing debate.
I will be deeply disappointed if the regulator allows life offices to offer smoothed bonus funds as defaults