Guaranteed funds showed sterling performance last year during the height of volatility

The Metropolitan Multi-Manager Smooth Growth Fund Global (MMSGF) showed remarkable stability during the time that markets were at their lowest amidst the recent global financial crisis.

The graph below clearly demonstrates the sterling capital protection the MMSGF provided investors during the economic crisis, while the typical South African balanced retirement fund investment portfolio showed extreme volatility.

Click on image to enlarge

Smooth bonus funds have two main objectives:

• Capital protection over the short term; and,

• Generating real returns over the long term.

The MMSGF is clearly one of the pre-eminent funds in its peer group and has not failed to achieve these objectives – even during the recent market downturn. Furthermore, the fund provides monthly non-negative bonus declarations on a net of fees basis.

The fund is secured by Metropolitan’s strong capital position. While legislation requires a minimum Capital Adequacy Requirement (CAR) cover of 1x, according to its latest audited results, Metropolitan has a CAR cover of 3.7 times. This factor is especially important considering that CAR cover is a good indication of the financial strength of an insurer’s balance sheet. According to Metropolitan’s recent Client Service Survey, financial stability of a company was rated as the most important factor which clients take into account when looking at who to do business with.

In the most recent review of Metropolitan undertaken in December 2009, Fitch Ratings maintained the group’s rating at AA- (national insurer financial strength), a reflection of the group’s capital soundness as well as its business position and prospects.

Considering that market volatility is likely to continue in the near term due to new risks in the global economy - including growing fears of a sovereign debt crisis in Europe and fears of more Chinese policy tightening – this underscores the main message to retirement funds, that capital protection must still remain a top priority.

Risk aversion is still evident across the global economy. Data from many developed and emerging markets - including most recently India - shows that inflows into equity funds are at extremely low levels, in India’s case, the lowest level in five years.

Over the last year or so a number of retirement funds have opted for other relatively risk-free investment options such as money market funds. Prior to this, there had been sizeable flows from smooth bonus funds into absolute return funds, many of which have failed to protect investors’ capital in their very first challenge – the recent global economic recession.

Trustees are faced with looking for the best possible returns on a risk-adjusted basis based on the membership profile of the retirement fund. For members approaching retirement in particular, they cannot be exposed to the effects of market volatility – smooth bonus funds are very well suited to manage this risk.

Trustees’ (and members’) investment challenges can be met by investing in smooth bonus funds. Sitting on the sidelines or simply leaving funds invested in cash may not be the most prudent option.