Dealing with uncertainty
South African savers are accustomed to uncertainty. Most have watched with growing unease as the real annual returns from their multi-asset portfolios trend towards zero.
A quick look at the five-year average unit trust category returns to April 2020, sourced from Morningstar, confirms that we are in boatloads of trouble. Against a backdrop of a 5% average CPI, investors earned 11,2% per annum from the foreign equity category, with SA Cash (7,3%), SA Bonds (5,2%), Diversified (2,5%), and SA Equity(-1,7%) lagging by some margin. These returns include the small and possibly premature recovery in listed share prices following the 2020 lows achieved globally between 19 and 23 March.
Entering 2020: Baggage in hand
The poor five-year performance is making it increasingly difficult for local savers nearing retirement to remain calm. FAnews recently attended a webinar titled “Dealing with uncertainty”, hosted by Alexander Forbes, to learn what advice they had for retirement fund members during the COVID-19 pandemic. Alexander Forbes is a diversified financial services firm focused on retirement provisioning, asset management, and wealth management solutions. Belinda Sullivan, Principal Consultant at the firm, told attendees that their 2020 outlook had been gloomy before the pandemic struck.
Alexander Forbes expected higher volatility in global markets, despite reduced geopolitical risks. They observed that many global tensions had deescalated in the second half of 2019, including a pause in trade tensions between the US and China; clarity around the Brexit deal; and subdued tensions between the US and Iran. But things were looking dire on the domestic front. “South Africa has experienced a tough couple of years, we had a low growth outlook for 2020 [on the back of] struggling SOEs; ongoing load shedding; the slow pace of economic reforms; and inadequate growth to stimulate the economy and stabilise debt,” said Sullivan. To make matters worse, South Africa Inc ended 2019 with a second consecutive quarter of negative GDP growth, entering a technical recession. Things went from bad to worse with the confirmation of a global pandemic in January 2020 and the long-overdue ratings agency downgrade from Moody’s, end-March.
A period of unprecedented volatility
Fund managers must now factor in the economic impact of a national lockdown; the debt burden created by COVID-19 relief initiatives; the 1 600-plus forecast business closures; and millions of job losses to inform their view of asset class returns through 2020 and beyond. They face unprecedented volatility, as illustrated by the JSE All Share Index which started the year at 50 810 points, plummeted to just 38 605 points by 18 March, and clawed back to 51 307 by 18 May. But what does this mean for retirement fund members?
“The value of your portfolio is linked to the financial markets, you will see the underlying changes reflected in your retirement fund value,” said Sullivan. This truth will resonate with any retirement fund member who has recently gone online to check his or her fund credit. Alexander Forbes joined the long line of fund managers who have advised clients not to make hasty decisions when confronted with shocking declines in investment values. They warned that any change to a portfolio during such turbulent times is equivalent to converting a paper loss into a real loss. Of far greater concern is that savers who exit investments in the hope of avoiding the worst of a financial market decline are massively unsuccessful at timing their re-entry.
Retirement funds are financial instruments that are designed to achieve long term financial objectives. They offer protection by virtue of being managed by professional fund managers and being appropriately diversified according to savers’ life stages. Your fund manager will take sensible steps to protect your retirement investments from the worst of the market contagion, within their mandate, and according to the asset class restrictions imposed by Regulation 28 of the Pension Funds Act. And most members will be appropriately diversified to accommodate their life stages. Members who are younger should have higher exposure to higher risk asset classes like equities. “Those closer to retirement will have less exposure to risky assets and should be positioned to align how they are investing leading up to their retirement to their objectives once they go on retirement,” said Sullivan.
Options available to retirement savers
Michael Kirkpatrick, Head Individual Consulting Best Practice at Alexander Forbes, took a few minutes to discuss the options available to retirement fund members whose retirement dates fell in the 2020 calendar year. The first and preferred option was to defer retirement to a later date. “This allows time for your fund credit to recover as we move through the market cycle – and presents an opportunity to pay more into the pot you will eventually draw a retirement from,” said Kirkpatrick.
Those who could not delay retirement until after the current period of financial market contagion could consider purchasing a guaranteed annuity, a living annuity, or a combination of the two. “The recent increase in bond yields means that insurers are offering increased annuity rates – which would partially compensate guaranteed annuitants for the reduction in their fund values,” said Kirkpatrick. A living annuity structure, which involves the reinvestment of retirement capital into market-linked portfolios, would buy some time for capital values to recover, subject to a disciplined drawdown of annual income. A final option would be to withdraw part or all the fund value in cash, subject to the retirement regulations.
Some sage advice
Kirkpatrick closed his presentation with some sage advice from investment guru, Benjamin Graham, who once said: “The best way to measure your investing success is not by whether you’re beating the market; but by whether you’ve put in place a financial plan and a behavioural discipline that is likely to get you to where you want to go”. The process of achieving risk-appropriate financial outcomes is best achieved with assistance from a financial planner, who should be on hand to guide retirement savers at each critical point in their life journey, and continually adjust their financial plans to suit their circumstances. Sound financial advice will ensure that you stick to your long term objectives; ignore market noise; and refrain from making damaging decisions based on short-term market fluctuations.
Writer’s thoughts:
Alexander Forbes urged retirement savers to stay calm and place faith in their long term financial plans. The consensus view is not to allow short term market fluctuations to derail a multi-decade plan that was structured based on risk and return assumptions and predetermined financial outcomes. How have you managed your and your client’s concerns given that the 2020 COVID-19 pandemic arrived on the back of a five-year multi-asset return slump? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].
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