Get­ting the most out of life af­ter re­tire­ment

In­fla­tion and not know­ing how long they will live are two of the most im­por­tant fac­tors re­tirees have to plan for. OLD MU­TUAL REAL IN­COME FUND

Finweek English Edition - - FUNDFOCUS -

tak­ing into ac­count that if you re­tire at the age of say 60 or 65, your re­tire­ment years may be al­most as many as your work­ing years, and it’s not im­pos­si­ble that you may need 10 to 12 times your fi­nal av­er­age salary for in­come pur­poses. Med­i­cal ex­penses, in­clud­ing frail care, tend fur­ther­more to rise ex­ten­sively on re­tire­ment, with med­i­cal in­fla­tion per­haps dou­ble that of nor­mal in­fla­tion. The Amer­i­can ex­pe­ri­ence, which is prob­a­bly valid for South Africa too, is that one out of ev­ery four peo­ple who have reached 65 will even­tu­ally re­quire some kind of long-term care.

Old Mu­tual In­vest­ment Group’s Old Mu­tual Real In­come Fund co-man­ager, John Or­ford, high­lights two spe­cific prob­lems fac­ing peo­ple into re­tire­ment:

They don’t know how long they’re go­ing to live, which could be an­other 20 years on av­er­age and is get­ting longer. A re­tire­ment age of 65 may not be the right time to re­tire, but that’s a dif­fer­ent ques­tion.

They will need to cope with in­fla­tion which over the last decade has av­er­aged slightly over 6% per year. As­sum­ing a sim­i­lar rate of in­fla­tion go­ing for­ward, this means that you need to grow your in­come by at least 6% to keep pace with the cost of liv­ing, and even a lit­tle more if your spe­cific in­fla­tion rate is higher than the over­all in­fla­tion rate.

Or­ford’s Real In­come Fund has been de­signed very specif­i­cally to ad­dress these is­sues. The ob­jec­tive is to de­liver a re­turn of 1%-2% af­ter in­fla­tion and in­clud­ing fees.

This means pro­vid­ing an in­come that grows in line with in­fla­tion while sus­tain­ing the level of cap­i­tal over time and min­imis­ing any losses over a 12-month pe­riod. The as­set al­lo­ca­tion is ac­tively man­aged to take ad­van­tage of chang­ing mar­ket con­di­tions.

The av­er­age an­nual re­turn has been 9.2% over 10 years; 8.9% over five years; 7.5% over three years; and 6.5% over one year. It’s a top-quar­tile per­former if you com­pare it with multi-as­set in­come funds over pe­ri­ods of five years or more.

The fund may in­vest in the full spec­trum of fixed-in­ter­est in­vest­ments. This in­cludes a max­i­mum of 25% in se­lected listed prop­erty and up to 10% in eq­ui­ties. De­riv­a­tives may be used for risk man­age­ment pur­poses.

Im­me­di­ate prospects

“Its re­turns dur­ing the past two years have been dis­ap­point­ing, but I’m con­fi­dent that it will gen­er­ate re­turns in line with its real tar­get go­ing ahead,” says Or­ford. “I don’t ex­pect it to go back to de­liv­er­ing the kind of long-term re­turns that we have seen pre­vi­ously, and that’s sim­ply be­cause I don’t think that we’re in that kind of en­vi­ron­ment.

“But I do ex­pect the fund over a rolling three­year pe­riod to con­tinue to meet its in­fla­tion tar­get, and cer­tainly to beat money mar­ket funds, which it has done com­fort­ably in the past.”

The cur­rent port­fo­lio break­down shows SA cash 48.1%, nom­i­nal bonds 19.2%, in­ter­na­tional bonds 6.7%, SA prop­erty 10.8%, in­ter­na­tional prop­erty 5.1%, and SA eq­ui­ties 4.5%.

“Growth as­sets aimed at de­liv­er­ing good re­turns over a pe­riod of time are an im­por­tant fea­ture of the fund rel­a­tive to other multi-as­set funds,” says Or­ford. “Nat­u­rally, it’s well-weighted Real In­come Fund co-man­ager at Old Mu­tual In­vest­ment Group with fixed-in­come as­sets and very much fo­cused on gen­er­at­ing in­come. The yield com­pares well with those of money mar­ket funds, and there’s a quar­terly dis­tri­bu­tion.”

He con­cedes that the fund is marginally more volatile than its peers, but says that this is com­pen­sated for by of­fer­ing more growth.

The 48% cash com­po­nent is man­aged by Old Mu­tual as­so­ciate Fu­ture­growth, and in­cludes money mar­ket, de­posits and con­sid­er­able credit. “It’s a pro­duc­tive part­ner­ship that gives us ac­cess to the best credit man­ager in the coun­try,” Or­ford ex­plains.

He says the last two years the fund had too much ex­po­sure to the nom­i­nal bond mar­ket when the du­ra­tion was a bit long. “But go­ing for­ward I ex­pect that it will give us some good re­turns, and, in fact, it has been one of the bet­ter per­form­ing as­set classes the year to date.”

Global bonds are some­what dif­fer­ent, with wide spreads be­tween emerg­ing and de­vel­oped mar­ket bonds. The for­mer are cur­rently look­ing bet­ter than pre­vi­ously, whilst per­for­mance on US bonds, for in­stance, ought to be im­pacted by the like­li­hood of higher in­ter­est rates shortly.

On do­mes­tic prop­erty, Or­ford ex­pects the sec­tor to of­fer rea­son­able re­turns. While op­er­at­ing con­di­tions for South African com­pa­nies are likely to re­main tough over the next 12 months, in­ter­est rates should come down next year. This should ben­e­fit lo­cal prop­erty com­pa­nies which are rea­son­ably priced. Growth­point, for in­stance, of­fers a for­ward yield of about 8% and with some growth in div­i­dends should de­liver a re­turn of 10% or more per an­num over the next cou­ple of years.

“I don’t ex­pect it to go back to de­liv­er­ing the kind of long-term re­turns that we have seen pre­vi­ously, and that’s sim­ply be­cause I don’t think that we’re in that kind of en­vi­ron­ment.”

John Or­ford

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