Forty years old and still going ‘smoothly’
During a year in which market linked funds experienced some of their worst volatility in recent history, the performance of smoothed bonus products in 2008 has added to the growing interest amongst investors in investment products that can provide returns in excess of inflation and offer a range of protection options.
The value these products have provided investors during this period also justifies Old Mutual’s 40 year commitment to the smoothing concept when it comes to retirement fund investing.
Smoothed funds are designed to smooth out fluctuations in the market returns of the underlying assets. This smoothing mechanism translates into investors, such as retirement funds, enjoying long-term inflation-beating growth (unlike other strategies that invest in the 'lower risk' asset classes such as cash), while significantly reducing exposure to the short-term ups and downs of the markets.
In particular, the current benefits of smoothed bonus funds over market linked balanced funds (which experience the ups and downs of the equity market) were highlighted by the mixed fortunes experienced by the two strategies in 2008.
For example, while the SA Equities (All Share) return for the year ending 31 December 2008 was -23%, most smoothed bonus products offered by the major South African life insurers still managed to declare positive returns.
The difference in performance of these two investment strategies last year has highlighted how smoothed bonus portfolios can reduce the risk of retirement investors close to retirement age, having to seriously consider postponing their retirement dates in order to recover built up savings.
It was with this very notion in mind that more than four decades ago, Old Mutual launched the first guaranteed fund available to retirement funds – the Old Mutual Guaranteed Fund. This fund sought to offer investors inflation beating returns while presenting significantly lower risk by smoothing out returns over time, while guaranteeing capital invested.
Over the years, while the underlying concept of smoothing has remained consistent, the group has continually adapted its array of products to suit market needs. These include various levels of guarantees, more frequent bonus declarations and detailed transparency. While the more recent products may enhance the features of the Guaranteed Fund, they continue to be based upon the same fundamental philosophy.
Increasingly, retirement funds are recognising the benefits of the smoothing concept. The attitude of retirement funds towards investments are reflected in the findings of the 2008 Old Mutual Retirement Fund Survey, which suggest that protection strategies, such as smoothed bonus and absolute return products, are set to gain favour among retirement funds as they spread risk and aim for long term consistent returns.
Results from the survey showed that 60% of funds see room for smoothed bonus products in a life-stage portfolio, while 40% of funds interviewed are willing to pay a premium (approximately 70 basis points on average) for capital guarantees.
These findings confirm my belief that while smoothed bonus products will continue to evolve to suit changing investor needs, the underlying principle will endure, as it has done for more than 40 years.
