We live in wonderful times, with unprecedented advances in the medical sciences over the past century. But, as investors, the longevity resulting from improved preventative and remedial care has unintended consequences – how do we make our retirement savings last?
“Longevity is a big problem and causing shortfalls in retirement,” said Fred White, head of Balanced Funds at Sanlam Investment Management (SIM) at the recent All Access Summit hosted by Sanlam Investments. To illustrate the amplitude of the problem, he used the latest longevity data from Sanlam’s actuarial team.
Born in 1967? Plan to live until age 95
According to Sanlam’s actuarial tables, a male born in 1967 can expect to live to age 91. A female will live even longer. On average, we need to prepare for someone born in 1967 to live up to age 95 years. For many employees, their company retirement date is set at age 60. Assuming that one starts working at age 25 after a few years of studying, 35 years of working life have to provide for 35 years of retirement. That is a daunting 1:1 ratio!
“So, if you’re not getting a real return, the reality is you need to live off only half your salary while working and save the other half to start living off from age 60. And you have to be satisfied that at some point in the future you’ll have to start living off the same level of income as when you first started working. Or you’ll be facing a shortfall,” Fred said.
Growth assets are key to avoid a shortfall
Fred co-manages the SIM Balanced Fund along with Ralph Thomas. When these two managers took over the fund, they realised that investors were choosing the fund mainly as a long-term return oriented solution.
“Investors choose balanced funds not for the same solution as absolute return funds. They come to a balanced fund because they want growth,” Fred said. “That’s why we will, on average, have a bias to growth assets.”
Fred pointed out that, despite most growth assets trending sideways over the most recent four years, over the past 13 years growth assets have provided significant outperformance versus fixed income assets (and that includes the poor performance of the past four years and the drawdowns of the great financial crisis).
But growth assets require a long-term commitment
Growth assets do come with the complication of larger drawdowns, though. The most important thing that investors need to remember is that drawdowns recover again and over the very long term the outperformance of growth assets over bonds has been consistent. Fred warned that investors need to prepare themselves for interim periods in which the opposite is true, i.e. when fixed interest assets outperform growth assets. Occasionally, this can be true, but the timing of such events are near impossible to predict. Therefore, if you have a bias towards growth assets, you need a supplementary protective strategy that looks at drawdown risk.
Fred and Ralph spend the bulk of their time looking for ways to firstly enhance returns and secondly find protective strategies that supplement their growth bias.
The quest for enhanced returns
An example of how the managers enhance the returns of the SIM Balanced Fund is the fund’s exposure to a unique basket of international real assets - a carve-out from one of Sanlam’s UK-based absolute return funds. Fred said, “The real assets have long-term rental contracts in place and most of them have escalation clauses that link the income growth of these assets to inflation. The real assets include property, infrastructure and renewable energy, but also interesting assets such as music rights and aircraft leasing, for example. We didn’t want to make an allocation to the entire absolute return fund, so we managed to arrange a carve-out of the real assets in which we were interested.”
Protective strategies that supplement the growth bias
Fred emphasised that the SIM Balanced Fund is not an absolute return fund; it’s not looking to eliminate drawdowns over any one-year period completely. “We attempt to avoid portions of large drawdowns.”
Keeping in mind that protective strategies are a type of insurance, and insurance always comes at a cost, the fund managers keep the insurance cost (which often manifests itself as an opportunity cost) as low as possible to not compromise potential returns unnecessarily.
For example, if equities were to fall by 30%, the managers’ objective would be to avoid half that fall – not the entire fall. “Protecting against the entire fall would be too expensive,” Fred said. “We only put protective structures in place if we believe they can enhance the long-term returns of the fund by cancelling out part of the downturns.”
Fund managers and investors in the long game together
When Fred and Ralph say that they understand the longevity challenge that investors face and that they manage the SIM Balanced Fund so as to maximise long-term growth without taking on undue risk, it’s not just talk. They have bet the proverbial “farm” on it. The fund managers hold no other significant long-term investable assets other than their units in the SIM Balanced Fund. “Even our share options have been folded into units in the fund we manage and they only start vesting on the day we retire,” Fred disclosed. “We are fully invested alongside our clients for many years to come.”
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The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The fund may from time to time invest in foreign instruments which could be accompanied by additional risks as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme/ Standard Chartered Bank is the appointed trustee of the Satrix Managers Scheme.
The SIM Balanced Fund may from time to time invest in foreign countries and therefore it may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The Retail class is the most expensive class offered by the Manager. The maximum fund charges include (including VAT): An initial advice fee of 3.45%; annual advice fee of 1.15% and annual manager fee of 1.26%. The most recent total expense ratio (TER) is 1.70%. The source of the performance data is Morningstar – to 31 October 2018. The worst 12-month performance for the Fund is -6.72%. The best 12-month performance is 21.25%.
The SIM Top Choice Equity Fund’s retail class is the most expensive class offered by the Manager. The maximum fund charges include (including VAT): An initial advice fee of 3.33%; annual advice fee of 1.15% and annual manager fee of 1.03%. The most recent total expense ratio (TER) is 1.14%. The source of the performance data is Morningstar – to 33 October 2018. The worst 12-month performance for the Fund is -11.19%. The best 12-month performance is 31.45%.
Please note that past performances are not necessarily an accurate guide of future performances, and that the value of investments / collective investment units / unit trusts may go down as well as up. Commission may be paid and, if so, would be included with the brokerage charges, securities transfer tax, auditor’s fees, bank charges, trustee fees and levies in the overall costs, which will be levied against the fund. A schedule of fees and charges and maximum commissions is available from the manager, Sanlam Collective Investments(RF) Pty Ltd on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. The worst 12-month performance for the Fund is 5.80%. The best 12-month performance is 15.20%. Portfolio performance is calculated on a NAV to NAV basis and does not take any initial fees into account. An annualised growth rate is used for all performance data of 12 months or longer. Income is reinvested on the ex-dividend date. Total return performances are published. The source of performance data and risk statistics is Morningstar. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The manager has the right to close the portfolio to new investors in order to manager it more efficiently in accordance with its mandate.