Be mindful in times of low growth
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”.