Living annuity income comparison
27 Mar, 2023

Lehan Kruger, Portfolio Manager at Glacier Invest

 

A practical comparison of an average medium equity portfolio and the 4% Real Income Solution

 

The Glacier Invest Real Income and Real Growth Solutions have been built to focus on reducing the two most important risks that living annuity investors are facing today. The risk of outliving your capital (longevity risk) and the risk of eroding your retirement capital if you retire when, or just after, there is a market crash, accompanied by the risk of timing drawdowns (sequential risk) – are very real issues that retirees face.

 

The solutions have been constructed and designed in such a way that they are able to increase consistency and the predictability of income for retirees. This is done by utilising a portfolio construction methodology that results in investment portfolios with asymmetric return profiles.

 

By focusing on asymmetry, outcomes can be managed in a more predictable fashion while providing for enhanced compound annual growth rates. The Real Income and Real Growth Solutions aim to protect retirement capital during market downturns, while also enhancing returns by including alternative higher-return asset classes such as private equity and private debt in retail client portfolios.

 

They are designed to incorporate non-traditional investment opportunities such as hedge funds, smoothing techniques and alternative investments. The allocations to alternative asset classes not only provide greater diversification benefits but they also enhance portfolio returns. This allows investors to be invested in portfolios aligned to their return objective, but at significantly lower levels of risk compared to traditional long-only asset classes.

 

Using this outcomes-based approach, potential living annuity investment portfolios can be categorised based on their volatility and drawdown profiles.

 

 

Comparison: Average medium equity portfolio versus the Glacier Invest 4% Real Income Solution

 

Our research has shown that our uniquely constructed living annuity solutions improve the overall outcome for living annuity investors, through a more stable and superior risk/return profile. We believe that when assisting clients with choosing a solution, one should follow an outcomes-based approach to decide on their risk profile. This means that any solution should be measured according to the volatility levels inherent in the investment portfolio as well as the likely maximum size of the drawdowns that the portfolio could incur. This is as opposed to choosing a portfolio that has been profiled according to its underlying asset allocation.

 

In the example below, we conducted an analysis on the outcome of entering retirement mid-2014. We allowed the illustration to run into December 2022 to include the impact of the COVID-19 lockdown and period thereafter. The intent of the analysis is to illustrate the difference in outcomes between an investment in an average medium equity portfolio and an investment in the Glacier Invest 4% Real Income Solution.

 

Analysis parameters for illustrations

  • Starting capital for living annuity: R1 million
  • Income drawn per annum: 4% (0% escalation rate)
  • Start date: 1 September 2014
  • End date: 31 December 2022

 

Illustration of the performance of an investment in an average medium equity portfolio

Based on their income needs, the client would have been invested in the SA Multi-Asset Medium Equity category, as this would provide the asset allocation that matches the risk they would theoretically need to take on, in order to fund their income needs.

 

Source: Sanlam Investment Multi-Managers, Glacier Invest, December 2022

 

In the graph above, the solid blue line indicates the changing capital value of the client’s remaining living annuity.

  • The green vertical bars indicate the level of nominal income the client would have received, assuming they drew 4% of the remaining capital value at the end of each year during retirement.
  • The yellow vertical bars indicate the level of real income (taking inflation into account) that the client would have received each year.

As we can see, their capital base would have significantly reduced by the end of the period, and they would have had to cut back on their income towards the end.

 

 

Illustration of the performance of an investment in the Glacier Invest 4% Real Income Solution

 

Source: Sanlam Investment Multi-Managers, Glacier Invest, December 2022

 

The graph above illustrates an investment in the Glacier Invest 4% Real Income Solution.

  • The green vertical bars indicate the level of nominal income the client would have received, assuming they drew 4% of the remaining capital value at the end of each year during retirement.
  • The yellow vertical bars indicate the level of real income (taking inflation into account) that the client would have received each year.

 

It is important to consider the impact of inflation on income, as it reflects the impact of purchasing power on your income over time.

 

The graph shows that the portfolio, which was constructed based on volatility and drawdown profile rather than asset allocation, would have allowed the client to properly meet their income needs while still protecting the value of their underlying portfolio.

 

 

What differentiates the Glacier Invest Real Income Solutions?

 

An asymmetric approach

 

The portfolio construction methodology and the wider range of uncorrelated assets included creates an asymmetric return profile for the portfolio. Asymmetry means that the portfolio is constructed to provide more protection against market downturns, but still capture most of the upside when markets rise. This asymmetry therefore results in higher compound annual growth rates and lower volatility, ensuring outcomes that are more consistent and reliable over the long term.

 

Diversification and return enhancement

The greater range of asset classes included in the solutions ensures greater diversification, as well as enhanced returns. Hedge funds bring diversification to portfolios, smoothing creates more income stability and a reduction in volatility, and alternative asset classes boost returns. When combined into one portfolio, the addition of hedge funds, smoothing techniques and alternatives will all promote lower drawdowns, less volatility and a more consistent income journey.

 

ENDS

This article first appeared on Glacier Invest

Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.

Sanlam Life Insurance Ltd is a Licensed Life Insurer, Financial Services and Registered Credit Provider (NCRCP43).

Sanlam Multi-Manager International (Pty) Ltd FSP 845 is a licensed discretionary financial services provider, acting as Juristic Representative under Glacier Financial Solutions (Pty) Ltd

As Juristic Representative of Glacier Invest, Sanlam Multi Manager International (Pty) Ltd manages the retail investment solutions.

The Glacier Invest Real Income Solutions include wrap fund portfolios managed by Glacier Financial Solutions (Pty) Ltd., a Licenced Discretionary Financial Services Provider, FSP 770, trading as Glacier Invest

The Glacier Invest Real Growth Solutions are managed by Glacier Financial Solutions (Pty) Ltd.

 

Author

@Lehan Kruger
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