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The Essential Income Fund

13 May 2019 Duggan Matthews, Investment Professional and Chief Investment Officer at Marriott
Duggan Matthews, Investment Professional and Chief Investment Officer at Marriott

Duggan Matthews, Investment Professional and Chief Investment Officer at Marriott

Four years of disappointing equity market returns have left many investors feeling anxious about their financial futures. The common narrative used to ease concern is that investing is about the long-term and that better returns are around the corner. This is all good and well pre-retirement when investors are continuously making contributions. However, it is not so simple for retired investors who need income from their investments for 20 to 30 years.

Unlike pre-retirement, the requirement to continuously withdraw from a portfolio significantly increases the risk of running out of capital (longevity risk) when market returns are poor. The task of successfully navigating a low-return environment is complicated further with a choice of over a 1000-unit trusts in South Africa. Remarkably, even with all this choice, retirees are still encouraged to only draw 4% from their savings to ensure a sustainable retirement income. This is far too low for the majority of retirees (the average drawdown in SA is approximately 6.6%) and this suggests an alternative approach is needed.

Spend the income not the capital for a better retirement outcome

Given the challenge facing retirees, Marriott has launched the Essential Income Fund. Designed and managed for South African investors looking to maximise their retirement lifestyles without the risk of running out of capital, the Marriott Essential Income Fund offers a simple, low-cost and effective means for retirees to navigate the current low-growth environment.

With an exclusive focus on retired investors, we have applied our signature, Income Focused approach to managing the Essential Income Fund. The portfolio’s key differentiating factors are outlined below:

Reliable, growing income

When an investor requires an income from their investment, Marriott recommends drawing only the income produced by the investment, which we refer to as the matching principle. By drawing only the income produced, investors can be assured that their capital base will not be eroded (the biggest contributor to longevity risk). To achieve this the Marriott Essential Income Fund invests exclusively in companies that have been able to pay reliable and growing dividends consistently over the long-term such as, Clicks, Growthpoint, Sanlam and Standard Bank. The dividend track records of these companies are illustrated below:

Optimal long-term asset allocation

The Essential Income Fund currently produces a gross yield of 6.9% which should grow in line with inflation over time. This has been achieved through investing in an optimal mix of both growth and higher yielding assets classes as outlined in the table below.

Asset Class

Asset Allocation

Current Income Yield

Long-Term Income Growth

SA Equities

40%

3.6%

8-10%

SA Property

35%

9.0%

3-5%

SA Long Term Bonds (15year)

20%

9.6%

0%

Cash

5%

7.0%

0%

Portfolio Total

100.0%

6.9%

4-6%

Source: Marriott

 

The Fund's asset allocation will remain relatively stable over time as we believe this is the right mix for investors looking for the highest sustainable level of inflation-hedged income.

Low cost

The annual management fee of the portfolio is 0.75% which is highly competitive.

Investor benefits

A combination of an income-focused approach with an optimal long-term asset allocation and a low fee results in a number of key investor benefits which are outlined below:

1. Sustainable income – no longevity risk

By investing in assets that produce reliable and growing income streams, our income-focused approach looks to match the income requirements (Rand liabilities) of retirees with the income produced by their capital (Rand assets). Investors can, therefore, live off the income produced by their investments without eroding capital which effectively eliminates the risk of running out of capital post-retirement.

2. More Income – higher drawdowns

The Essential Income Fund combines the benefits of both traditional living annuities and guaranteed annuities by enabling an investor to draw a higher level of sustainable income with increased flexibility (access/ability to leave a legacy). This is outlined in the table below:

 

Drawdown Level

Income Growth

Access & Legacy*

Essential Income Fund

6.0%

Inflation

          √

Traditional Living Annuity

To guard against the risk of a market downturn in the early years of investment (“sequence of return risk”), a 4% withdrawal rate, including management fees, is the generally accepted “safe” maximum withdrawal rate for retirees who require an inflation-hedged income stream.

 

 

 

4.0%

 

 

 

Inflation

 

 

 

        √

Guaranteed Annuities

Guaranteed annuities provide investors with a relatively high level of inflation-hedged income without longevity risk; however, investors forgo access to their capital and cannot leave a legacy to beneficiaries. The Essential Income Fund provides a similar level of income to Guaranteed Annuities and the additional flexibility (access/legacy) offered by living annuities.

 

 

 

 

 

5.5%

 

 

 

 

 

6%

 

 

 

 

 

        χ


* The Drawdown % for Guaranteed Annuities assumes joint life for a couple aged 60 with a 6 % escalation as per 4th Quarter Personal Finance rates from the 5 top insurance companies. Access refers to the flexibility an investor has to draw more income/capital from the investment in any given year. Legacy refers to the ability to leave the capital for beneficiaries.

3. Exposure to quality companies

The cornerstone of the Essential Income Fund is exposure to only the highest-quality South African dividend paying companies (property and equities) and government bonds. Applying our Income Focused investment approach, we take no shortcuts (“reaching for yield”) in producing the Fund’s income.

The companies we select are responsible for generating the income for our investors into perpetuity, and therefore investing in quality businesses that are able to continually grow their earnings through all cycles is paramount. Over the long-term companies of this nature tend to produce solid income and capital returns.

Summary

Subdued returns and endless choice have left many retirees feeling anxious about their financial futures. Using the Essential Income Fund to “spend the income not the capital” will get your retirement plan back on track. For more information on the fund please visit Marriott’s website (www.marriott.co.za).

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