A safe haven in times of market turmoil
The current upheaval in world markets again underscores the important role that low-volatility investment strategies, such as smooth bonus portfolios, could play for investors, especially retirement funds and their members. The fall-out in the United States sub-prime mortgage market has increased volatility in markets world-wide, with the full impact not yet known. As a result, both debt and equity markets could remain volatile for some time.
Braam Naud, the Head of Institutional Guaranteed Investment Portfolios at Old Mutual Corporate, says the smoothing mechanism of smoothed bonus portfolios provides a safety net for investors and brings stability to returns in times of market volatility as is currently being experienced. For example, the JSE All Share Price Index lost more than 8% over the month to the middle of August 2007, shedding all gains made since March 2007.
"The smoothed bonus strategy uses a reserving mechanism to absorb the impact of the peaks and troughs associated with investing in a diversified underlying investment portfolio, while in the longer term delivering real returns to investors in line with their exposure."
The Old Mutual Guaranteed Fund, the country's largest capital guaranteed smoothed bonus portfolio, has delivered a record 27% gross return for its investors over the past year. The fund has delivered, on average, a real return of 5.1% per year above the inflation rate over its 40-year lifespan, says Naud.
Naud says this exceptional performance can partly be attributed to the strong growth in equity markets over the past few years. Going forward, it is likely that market volatility will remain a feature for some time. However, economic fundamentals remain strong but investors should be cautioned against expecting the level of returns experienced over the last few years to continue unabated. Together with the strong smoothing reserves built up through their smoothing mechanism, this suggests that smoothed bonus portfolios remain well positioned going forward to continue producing superior returns but with significantly reduced short-term volatility.
