New smoothed bonus fund cuts out costly guarantee

TRADITIONALLY, smoothed investments have been the domain of the major life assurance companies. But now innovative kid on the block Sygnia has launched one.

Smoothed-bonus funds, as they are widely known, are suitable for investors with a low appetite for market volatility and who want to preserve their capital, perhaps because they are nearing retirement. The life companies usually offer them with some sort of guarantee, typically on the capital amount and on declared bonuses.

The fund smooths out your investment returns by reducing returns in good years in order to boost returns in bad years.

Old-generation smoothed-bonus products raised concerns about how the smoothed returns (or “bonuses”) were calculated, and the relatively high costs they incurred.

Sygnia has launched the Sygnia Stabilised Growth Fund, aimed at retirement savings.

Sygnia says the fund targets a smoothed annual return of 5% above inflation with no expensive capital guarantee charges, “which often deplete savings with no commensurate return on investment”.

The assets are invested in either a medium-risk, fully passive balanced fund or a blend of active and passive investments, Sygnia says.

Sygnia says its “robust smoothing methodology allows retirement fund members to enjoy the best of both worlds: participating in the long-term returns of a well-diversified growth strategy, combined with the benefit of less volatile returns over the shorter term”.

Bonuses are declared monthly in advance, with a portion of the investment returns held back during periods of relatively strong performance, to supplement returns that would typically be declared during periods of weaker performance.

Sygnia says its adoption of a “smoothing” approach, rather than an explicit “capital guarantee” approach, is premised on the fact that most traditional smoothed-bonus products “are structured in such a manner that the guarantees are almost never likely to be invoked, despite extremely high-charging structures. Consequently, the benefit of the guarantee is extremely low relative to the fees incurred.” – Martin Hesse