Be mind­ful in times of low growth

Finweek English Edition - - Fundfocus Introduction - By Christo Lin­eveldt Christo Lin­eveldt

tIn­vestors are all af­ter that very im­por­tant real re­turn on in­vest­ment, and there­fore get spooked eas­ily dur­ing pe­ri­ods of low re­turns. That’s when it’s im­per­a­tive to re­mem­ber that in­vest­ing is a jour­ney, not a race.

he need to sus­tain a grow­ing in­come in re­tire­ment over mul­ti­ple decades re­quires a re­turn in ex­cess of inflation – an ob­vi­ous state­ment. Less in­tu­itive, is that real re­turns do not ma­te­ri­alise in a uni­form fash­ion. Con­sider Graph 1, which com­pares the value of R100 in­vested in Coro­na­tion’s flag­ship post-re­tire­ment fund, Cap­i­tal Plus, with an inflation-ad­justed value of R100 since in­cep­tion of the fund.

Since its launch 17 years ago, it has man­aged to beat inflation by 6.6% per an­num, re­sult­ing in a near tripling of pur­chas­ing power. By di­vid­ing the his­tory into dis­crete three-year pe­ri­ods (the min­i­mum rec­om­mended in­vest­ment hori­zon), one can bet­ter ob­serve the in­vestor jour­ney over time.

For in­stance, an ex­tremely strong three­year pe­riod from mid-2004 to mid-2007 re­sulted in real re­turns of more than 20% per year – leav­ing many in­vestors with lofty re­turn ex­pec­ta­tions. That pe­riod was fol­lowed by three years char­ac­terised by the global fi­nan­cial cri­sis, which ul­ti­mately re­sulted in neg­a­tive real re­turns and re­vers­ing in­vestor sen­ti­ment com­pletely – only to be fol­lowed by an­other strong three-year pe­riod.

It’s use­ful to view the muted real re­turns of re­cent years in the con­text of longer his­tory. In pur­suit of beat­ing inflation over time, one can ex­pect to ex­pe­ri­ence episodes of dis­ap­point­ing re­turns, but can take com­fort from the fact that bet­ter times lie ahead.

Head­winds have turned into tail­winds

Multi-as­set port­fo­lios such as those man­aged for post-re­tire­ment in­vestors have var­i­ous sources of re­turns driven by dif­fer­ent fac­tors, in­clud­ing the yields of­fered on bonds and prop­erty. These yields have proved to be a sub­stan­tial head­wind to reach­ing in­fla­tion­beat­ing tar­gets over the most re­cent pe­riod of dis­pleas­ing re­turns.

But more re­cently, we have seen a sig­nif­i­cant shift in yields to the point where they pro­vide for tail­winds in reach­ing the real re­turn ob­jec­tives for post-re­tire­ment port­fo­lios.

Many in­vestors as­sess the fea­si­bil­ity of liv­ing an­nu­ities based on the per­for­mance of the un­der­ly­ing funds over the re­cent past (look­ing back­ward). In con­trast, guar­an­teed an­nu­ities are as­sessed on the in­come of­fered to the in­vestor by the life of­fice, which is in­formed by the fu­ture ex­pected re­turns from mar­kets such as the yields of­fered on long-dated bonds and prop­erty (look­ing for­ward). The back­ward­look­ing na­ture of liv­ing an­nu­ities ver­sus the for­ward-look­ing na­ture of guar­an­teed an­nu­ities could lead to in­vestors mov­ing as­sets into guar­an­teed an­nu­ities without ap­pre­ci­at­ing the fact that they will ben­e­fit from the same driv­ers in their liv­ing an­nu­ity in years to come.

Har­ness­ing the power of growth as­sets in re­tire­ment

Our re­cent anal­y­sis of in­dus­try flows high­lighted the de-risk­ing trends that re­sult from in­vestors switch­ing out of funds with ex­po­sure to growth as­sets into funds with lit­tle ex­po­sure to them.

It is worth­while re­mind­ing in­vestors that thought­ful ex­po­sure to growth as­sets (in the form of eq­ui­ties and prop­erty) re­mains cru­cial to a suc­cess­ful in­come draw­down plan. Take the ex­am­ple in Graph 2 us­ing two Coro­na­tion funds, both launched in 2001. The Coro­na­tion Strate­gic In­come Fund is aimed at in­vestors with im­me­di­ate in­come needs and, as a re­sult, does not have any ex­po­sure to eq­ui­ties.

The Coro­na­tion Cap­i­tal Plus Fund is aimed at in­vestors in re­tire­ment with long-term draw­down needs. It holds the op­ti­mal ex­po­sure to growth as­sets for that pur­pose – typ­i­cally rang­ing be­tween 40% and 70% of the port­fo­lio.

The graph shows the value of R1m in­vested in ei­ther fund for a range of start­ing draw­down rates be­tween 2.5% and 7% per an­num. The ben­e­fit of rea­son­able ex­po­sure to growth as­sets for in­come-draw­ing in­vestors be­comes clear over time. Pe­ri­ods of low re­turns typ­i­cally re­sult in greater scru­tiny of in­vest­ment port­fo­lios – some­thing that should be en­cour­aged.

In­vestors need to en­sure that their in­vest­ment port­fo­lios are still fit for pur­pose and that they are get­ting value for fees.

It may be sen­si­ble for some to take ac­tion, but in­vestors should avoid im­pul­sive de­ci­sions based on the very re­cent past. There is good rea­son to ex­pect bet­ter in­vest­ment out­comes in years to come. ■

is an in­vest­ment specialist at Coro­na­tion. This ar­ti­cle ap­peared orig­i­nally in the lat­est edi­tion of the Coro­na­tion house pub­li­ca­tion, “Corospon­dent”.

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