Con­sider smooth-bonus port­fo­lios

The Independent on Saturday - - PERSONAL FINANCE -

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.

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