Greater returns, less distress
By Samkelo Zwane, Investment product manager at Glacier by Sanlam
Every investor would like to maximise their return with very little volatility. However, the fact is that asset classes which have a higher return tend to also have higher volatility, so the higher the return you expect from an asset, the higher the volatility you should be prepared to accept. Equities, which have the highest expected return over the long term compared to other asset classes, also have the highest volatility. Cash on the other hand, which has the lowest volatility, has the lowest expected return over the long term.
Looking at the asset allocation of investors who are investing for the long term, a disturbing trend is observed: although investors in retirement annuities are investing over a time frame of 20 to 30 years, as much as 44% of these investors have less than 50% allocated to equities.
A shocking 40% of persons under the age of 40 saving through a retirement annuity also have less than 50% allocated to equities. Surely an investor who is 20 years from reaching his retirement goal should have a greater proportion in equities.
The trend gets worse post-retirement: About 70% of these investors (in the 55 to 65 age group) have a smaller than 50% allocation to equities. Taking into account that the life expectancy of an investor aged 60 is about 25 years, and that of an investor aged 70, 17 years, this investment situation is not ideal. Investors in investment linked living annuities (ILLAs) - a post-retirement product - are in a de-cumulation stage, which means that their income comes from accumulated funds, which in this case is their ILLA. About 54% of the investors aged between 60 and 70 are withdrawing more than 8% p.a. from their ILLAs as an income. A low allocation to equities coupled with such a high withdrawal rate spells trouble for these annuitants.
The fact is investors are averse to volatility. There are a few reasons for this, but we will only focus on two: The first is that investors use their salary to invest for the long term, but their salary is not guaranteed. They suffer a reduction in their salary due to ill health, demotion, an economic recession or even retrenchment. Secondly, investors’ expenditure is very variable. Investors spend most of their money repaying mortgages and car loans, purchasing food, and paying for children’s education and medical aid. All these factors result in investors being risk averse. This results in investors avoiding very volatile investments but then also forfeiting the alpha associated with more volatile assets.
Glacier by Sanlam has created a solution which enables clients to access growth assets such as equities, while employing a strategy to cushion their portfolio against extreme downside volatility. This essentially means that clients will benefit from the expected higher return of volatile investments and at the same time reduce the risk of sudden sharp drawdowns associated with volatile investments. More importantly, the strategy is personalised according to an investor’s risk profile.
Using the Glacier P² (Personalised Preservation) Strategies, an investor will be able to limit losses when the markets are falling and benefit from the participation when markets are rallying.
This is good news for investors in retirement annuities, who can now afford to allocate more to equities (subject to the limits of Regulation 28) in their portfolio without the fear of losing accumulated funds due to sudden market falls. The investor can expect higher returns in the long run than the returns he would have received investing in bonds or cash. For investors in ILLAs it also means that they can now afford to maintain their withdrawal rate without the fear of eating into capital.
Glacier Financial Solutions (Pty) Ltd, a member of the Sanlam Group
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