Old Mutual Edge28 Life Fund
When it comes to investing in a retirement annuity, pension fund or preservation fund, one has to comply with Regulation 28 when structuring the underlying investment portfolio. Regulation 28 limits the exposure that one is able to have to certain asset classes, and one of its objectives is to ensure diversification when it comes to investing pension monies. One of the limits imposed by Regulation 28 is that the investor may not have more than 75% exposure to equities.
A common complaint from clients and f inancial advisers is that Regulation 28 seems to work against younger investors who have time to withstand the volatility of equities and who can benefit from the higher expected returns associated with the asset class. They often quote return histories from the past century, which show equities to be the best performing asset class over the long term. While we agree that equities are often the best place to be invested in for the long term, we strongly believe in the principle of diversification, which implies that investors should have exposures to other asset classes.
The problem, at a practical level, for most investors is that most balanced funds (that comply with the requirements of Regulation 28) are too conservative relative to equity funds. Balanced funds are often underweight listed property, and unit trust balanced funds are not allowed to have exposure to alternative asset classes such as private equity and hedge funds. Unless investors are able to manage their own portfolios, they may find that they have to settle for a balanced fund.
Old Mutual’s Macro Strategy boutique has recognised the gap in the market for an “aggressive” Regulation 28 compli- ant balanced fund and in October 2011 launched the Old Mutual Edge28 Life Fund. In order to be able to include alternative asset classes it has had to shun the Collective Investment Scheme (CIS) (unit trust) structure. This limits access points to the fund, which are primarily available in Old Mutual pension products.
The fund has a performance target of CPI + 8% per annum, which is significantly higher than the CPI + 5% per annum target associated with most unit trust balanced funds. Management fees are performance based and range from 0.75% to 2.5% per annum, which is not cheap. The fund delivered a return of 21.67% for the year ended 31 January 2013, which is much higher than the 17.06% delivered by the average unit trust multi-asset high-equity balanced fund. It would have ranked 13th out of 104 such unit trust funds over that period.
It is still a young fund with a relatively short track record, but younger investors should benefit from the higher volatility when investing on a regular basis. They should also benefit from the higher expected returns over time which, coupled with the benefits of compounding, can prove to be a smart decision come retirement.