Think twice before leaping from equity funds into money market
• Retirees impatient with low returns from shares would lose out if they switched to cash now
After three years of low returns on equities, investors drawing an income from their investments may be considering shifting some of their portfolio towards cash from multi-asset funds with equity exposure.
However, the appropriate time for switching — if there was one — has passed. Retirees would risk eroding the longerterm value of their retirement capital if they switched now.
This trend towards cash has been evident in SA over the past year in the light of the higher returns (of about 7% a year) offered by bank deposits and money market funds compared with riskier equity holdings.
Poor equity performance has dragged down the returns of the diversified multi-asset funds in which many retirees are invested: the average Association for Savings and Investment SA (Asisa) low-equity multi-asset fund delivered only 6.6% a year over the three years to August 31 and the average high-equity multi-asset fund (the typical “balanced” fund) returned 6.1% a year over the period, according to Morningstar.
Compare these returns with the past 15 years, when lowequity fund returns averaged 11.5% a year, and high-equity funds averaged 13.9% a year.
The longer-term performances are comfortably above the funds’ generally accepted return targets of inflation plus four percentage points for the less aggressive low-equity category, and inflation plus six percentage points for the more aggressive high-equity category, with longterm inflation at about 6%.
Given the recent underperformance of multi-asset funds, retirees dependent on income from these funds may think they will benefit by moving to cash now. However, they would be too late. Current valuations show prospective returns from multi-asset funds are higher than those from cash assets. By moving now, retirees will be exposed to falling cash returns in future (the Reserve Bank has already started cutting shortterm interest rates), and will miss out on any improvement in returns from multi-asset funds.
The accompanying graph shows how a R1m retirement investment has performed over the past 15 years (July 2002-July 2017), starting with a drawdown of 5% annually and escalating it by inflation, when invested in different funds. The initial capital investment is represented by the fixed black line.
To have maintained its real value over time, it would have needed to grow at a rate equal to inflation, to R2.26m (as shown by the red line).
Would a money market investment have given the retiree an adequate return over the 15 years? Clearly not: the yellow line depicts how the R1m would have performed invested in the average South African money market fund (the Asisa IB money market category) while drawing the income. Due to its low return, the capital would have grown to just R1.25m.
Although it would have successfully given the retiree their income (totalling R1.1m), the real value of the retiree’s capital would have been significantly eroded (shown by the gap between the red and gold lines).
By contrast, an investment in the average low-equity multiasset fund is shown by the green line. Although the fund return varies over time, it outperforms or remains in line with inflation (red line) for much of the time.
Its more recent underperformance is partly compensated by the earlier excess performance. The retiree ends up with R2.09m, while also having drawn down R1.1m in income payments over the 15 years.
From this evidence, multiasset funds clearly have been delivering the expected returns over longer periods, and investors, especially retirees, need to think twice before moving away from them. Anyone switching to cash now is probably getting the timing wrong – they will receive lower returns over the longer term (as the graph demonstrates).
Or, if they are planning to switch back to multi-asset funds at a later stage, experience has shown that they will probably mistime their move.