Looking beyond guaranteed return products for inflation-beating returns
Many investors are seeking the same end-goal – long-term capital growth with limited volatility along the way.
Following the financial crises of 2008/09, many guaranteed return products have been launched into the market as companies aim to meet the investor’s need for certainty and capital protection.
Investors who invest in guaranteed return products typically do so because they’re saving for a specific goal and don’t want to risk not meeting that goal financially, due to market downturns. This makes it important that investors and their intermediaries understand the risk / return characteristics as well as the conditions attached to the different products available, and make sure that the selected product will meet the needs of the investor.
Over the short term (3 – 5 years) there is a place for products that offer a guaranteed return, or growth without the risk of losing capital, especially if the investor is saving for a specific end-goal and needs to know exactly how much they will have accumulated at the end of the investment term. However, when investing over a longer time horizon, the number of investment options available to the investor increases and it becomes necessary to also take into account the investor’s risk profile in order to select the most suitable product.
It’s natural for investors to focus on the risk of capital loss, but in the process they often overlook the fact that their savings also need to outpace inflation so that they can maintain their lifestyle into the future i.e. their savings need to grow in real terms. This can only be achieved by holding inflation-beating assets, such as equities, in their portfolio. Although short-term performance can be volatile, returns from equities tend to smooth out over the longer term to provide investors with solid, inflation-beating returns.
Investors with a conservative risk profile should consider taking on a limited amount of risk in order to at least give their savings a chance to outpace inflation.
For those investors who simply cannot endure the volatility of the equity market and require absolute certainty regarding their outcome at the end of the term, a guaranteed return product may be the best option.
However, investors who recognise the need for equities in their portfolio, but still require a degree of capital protection, have other options. These investors typically understand that investing in equities requires a longer time horizon. If they were saving for a specific end-goal, for example a child’s university fees in 15 years’ time, they could perhaps look at a fund offering inflation +3%.
History shows us that equities have been the best-performing asset class (as well as the best inflation-beating asset) over the last 100 years. Therefore, given that equity returns tend to smooth out over the longer term, investors who are saving for longer time periods (10 years and more) should typically not require a capital guarantee. If your guaranteed product does not let you participate in dividend growth, you could lose out even further, as a large portion of the growth in the value of shares comes from their dividends.
Investors wanting market exposure but without the ups and downs associated with equity market volatility could also consider investment options that provide a measure of cushioning against these market downturns.
Glacier by Sanlam has recently introduced Glacier P2 Strategies which allow more exposure to growth assets, while helping to reduce the risk of large losses in a portfolio due to market movements. This is achieved through dynamic re-balancing of the client’s portfolio between growth assets and money market instruments according to how the markets are performing.
