HOW THE FUNDS COMPARE

You need to understand the differences between the five low-cost indextracking retirement annuity (RA) funds so that you can make an informed choice about the one that is best suited to your financial needs. You should consider the following: Find out the costs of the underlying investments, which are usually expressed as a total expense ratio (TER). The TER takes into account the asset management fees, performance fees, custodian and trustee fees, trading costs and audit fees.

Some providers include the additional costs of buying exchange traded funds (ETFs), such as the stockbroking costs and Strate fees, in the TER they quote.

Then you need to find out if there is a charge for using an RA.

If the RA offers a choice of unit trust funds or ETFs, you need to find out the fee charged by the investment platform on which the ETFs or funds are offered.

If you buy an RA through a financial adviser, you will also have to pay a fee for advice.

With some RAs, there may also be a debit order fee if you invest on a recurring basis, but others subsidise this cost.

The table on the right provides a summary of the costs. The Absa Core RA invests in ETFs, while the etfSA RA and the Itransact RA invest in ETFs and exchange traded notes (ETNs).

The etfSA and the Itransact RAs offer a choice of three portfolios designed to meet your appetite for the risk associated with an exposure to equities that is low, moderate or high (up to the 75 percent allowed for retirement funds).

The Absa Core RA places investors in one of eight ETF portfolios according to your years from retirement. As retirement approaches, your exposure to riskier assets is reduced – a practice known as life-staging.

Investors in Sygnia’s Skeleton RA have a choice of three unit trust funds intended to suit different risk profiles. You need to use one of these three funds if you want to pay the lowest fees. You can invest in a Sygnia RA that invests in Sygnia’s multi-managed funds or in a selection of Sygnia’s other funds, as well as funds from other assets managers, but any of these options will result in higher costs.

The RA provided by 10X invests directly in the securities in the indices it tracks. 10X puts you in a portfolio that matches your investment time horizon with exposure to equities reducing from six years away from retirement. However, you can opt out of this portfolio and choose a high-, mediumor low-equity portfolio. Some of the RAs, such as Sygnia’s Skeleton RA, track well-known market indices, such as the FTSE/JSE Shareholder Weighted Index or the Morgan Stanley All Country World Index. Some of the RAs use their own indices. For example, 10X uses an equity index that tracks the 60 largest companies on the JSE, but prevents the largest shares from dominating the index by limiting a single share to six percent of the index.

Some RAs, such as Absa’s Core RA and Itransact’s RA, use enhanced indices, such as the NewFunds eRafi Overall ETF. This ETF tracks an “enhanced” index that uses the Research Affiliates Fundamental Indexation methodology to select the 40 largest listed companies on the JSE ranked in terms of their fundamental or economic value.

Absa also uses the NewFunds Equity Momentum ETF. The NewFunds Equity Momentum ETF is known as a style ETF and consists of 40 shares weighted according to the relative momentum of their prices.

etfSA’s portfolios use Nedbank’s BettaBeta ETFs, one of which accords an equal weighting to the top 40 shares on the JSE, while another weights shares based on environmental criteria.

etfSA’s RA has exposure to preference shares, Africa and, through ETNs, commodities.

Warren Ingram, a former Financial Planner of the Year and an independent financial planner and director of Galileo The allocation between asset classes, and therefore the mix of ETFs or index funds that provide exposure to the different asset classes, may never change (static), may change over the long term (strategic), may change periodically (dynamic), or may be managed actively in line with market conditions (tactical).

The 10X RA and the etfSA RA use static asset allocation, while the Itransact RA uses strategic asset allocation, changing the allocation in response to long-term movements in the risks of assets.

Absa’s Core RA uses dynamic asset allocation, which is adjusted every six months, depending on market conditions. Nedeljkovic says this is a passive process, based on algorithms, rather than decisions by a manager.

Sygnia uses tactical or active asset allocation and adjusts the allocations within strict ranges in line with the manager’s view on market conditions.

Magda Wierzycka, the chief executive officer of Sygnia, says when there are market movements that will obviously destroy value, it is better to take some assets out of the market. Wierzycka cites as an example the sale of South African bonds by foreign investors late last year and early this year, which caused the bond and equity markets to lose value.

Ingram says if your RA uses lifestaging, you should pay attention to how long before retirement the exposure to the riskier asset classes of equities and listed property will decrease, whether this may be too early and whether the allocation will suit your post-retirement needs. If it will not, you must find out whether you can opt out of the life-staging allocations.

Absa allows you to adjust your retirement age on its RA, and thus your asset allocation, to suit your circumstances, while 10X allows you to opt out of life-staging.

Ingram says that if you want to match your investments to your future liabilities, it is better to know what the asset allocation of your investment is, rather than have it managed on your behalf, but Tracy Jensen, an actuary at 10X, says this is true for only a few people who know how to match their assets to their liabilities, and it is better to provide a solution for the majority of people who do not.