Sheldon Friedericksen, GM: Group Benefits at Fedgroup

 

In the wild world of finance, where the stock market can be as unpredictable as a toddler on a sugar rush, one must navigate with the fitness of a poker pro. With companies dropping off the JSE like flies in a raid, investors are left scratching their heads wondering: where will future retirement fund portfolio returns come from? Fear not, dear reader, for we’ve got a winning strategy up our sleeve: alternative diversification. This is a key ingredient to success and should form part of financial plans to accommodate market volatility and provide long-term stability and predictability.

 

 

Always increase the members’ odds

 

Over time, we have been led to believe that equities are the way to go when it comes to building a strong investment portfolio. But according to Mike Bird, Asia business and finance editor for the Economist, equity performance has only been tracked for about 100 years. Yes, this might seem like a long time, but if you think about 50 year periods as a timeframe to track a single retirement investor’s lifetime of success, then there really were only two data periods to track, which doesn’t give you a lot to work with.

 

So, when it comes to employee benefits, diversification is a strong card to play and funds and advisors would do well to consider the smorgasbord of investment allocations available to members, within the constraints of regulations. More to this point, Regulation 28 guidelines specifically allow for a far greater allocation to non-listed entities compared to what is currently utilised by the industry in the retirement space.

 

But risk tolerance plays an important role when building up an investment portfolio because one of the first principles to consider is the member’s risk profile. The risk profile looks at the member’s tolerance for downside risk, often linked to the number of years they have left in the market to recover from a downward cycle. Cliff Asness, seasoned global investor and co-founder of AQR Capital Management provides perspective when he points out that the best portfolio to have is actually the one that gives you the best risk-adjusted returns.

 

Also, conventional wisdom advises that as members get closer to retirement, they should perhaps invest less in equities, to avoid excess risk, and focus more on cash and cash equivalents such as money markets. One can’t help but spot the irony linked to this because at least two-thirds of retirement benefits are used to purchase annuities and most annuities include an allocation of equities. Moving a large portion of your retirement funds back to equities; really?

 

Fedgroup holds a very different hand. Regardless of whether they’re fresh-faced newbies or seasoned veterans of the workforce, we believe that members’ funds should be given the best possible opportunity to deliver competitive returns and capitalise on dynamic market factors. In other words, members’ funds should be exposed to options that will help their retirement lump sum last longer, which is why diversification might be the ace to play. Let’s face it, life’s too short to stick to a one-size-fits-all investment strategy.

 

 

Stack the deck right to secure targeted, yet stable returns

 

Now, let’s talk returns. Most employee benefits aim for a “CPI plus three” mandate, meaning members’ investments will probably double or triple during their employment period. And, since members contribute monthly, they smooth out some of the volatility over time. This is because every time a contribution is made, they are buying at a different point in the market; sometimes higher and sometimes lower, which provides an average over the long-term. But why settle for mediocrity when you could aim for the stars?  At Fedgroup, we think more value can be unlocked through the inclusion of multiple asset classes and options such as fixed return investments. So, when member portfolios include investments with low returns and less volatility as well as investments that provide higher returns linked to higher volatility, it is wise to include a stabilising influence in the portfolio such as fixed income investments to pool together a more balanced, diversified investment portfolio. This gives new meaning to the saying, ‘It isn’t always about holding good cards. What’s more important is playing those you hold, well.’

 

 

Read the market and spot the tell

 

With the average replacement of income of South Africans sitting below 30%, it’s time to shake things up and start thinking diversification and challenging conventional investment philosophies of where to invest members’ hard-earned money.

 

The question we must ask is: Why are we not considering a wider range of sustainable investment opportunities in the employee benefit space? Well, maybe it is time to show our hand because there are indeed a number of investment opportunities such as fixed investments that can provide stability, inflation-beating returns, and consistent growth to support a predictable lump-sum to replace members’ income during retirement. More importantly, the cards are held by those with access to the right resources. Asset and fund managers should consider the long-term needs of members within these funds and structure portfolios that increase stability while giving members the opportunity to maximise their life savings.

 

So, there you have it. When it comes to employee benefits, it’s not just about holding good cards – it’s about playing them well. And with a little bit of diversification and a splash of certainty, your employee benefit fund is set for retirement.

 

 

ENDS