Consider smooth-bonus portfolios
YOU shouldn’t ignore smoothbonus funds offered by the big life assurance companies to combat volatility and sequence risk both as you approach retirement and in retirement, says Francis Marais, a senior research and investment analyst at Glacier by Sanlam.
“Smooth-bonus funds are designed specifically to address this sequence-of-return risk and reduce the volatility of your investments. This is typically done through regular bonus declarations, designed to provide a smooth return to investors,” Marais says.
“Smoothing does not reduce or increase the returns; it merely changes the timing of when returns are released. Different smoothing formulae may apply, but, essentially, during periods of strong investment performance, a portion of the underlying investment return is held back in reserve and is not declared as a bonus. This reserve is used to declare higher bonuses during periods of lower return than would otherwise have been the case. Bonuses are never negative, avoiding any drawdowns on portfolios.”
When selecting a smoothbonus portfolio, Marais says it is important to consider the financial strength of the life assurer, the transparency of the bonus formula and funding levels, the manager’s management philosophy and his or her experience and track record, and the strength of the governance structure.
He says smooth-bonus portfolios attract a guarantee fee in addition to an asset management fee, because the life company is required to hold a specified amount of capital in order to provide the guarantees underlying the portfolios. Because of the guarantees, there may also be an exit fee if you switch to another fund or disinvest. “These portfolios are therefore not suited to investors who want to switch between portfolios regularly,” Marais says.