• Editor

Living annuities: Innovation essential to achieve growth and income

When faced with high withdrawals, increasing longevity and a low returns environment, delivering smooth returns and growth for retirees requires innovation and out-the-box thinking. For its Living Annuity Strategy - which delivers income of between 2.5% and 6% - Sanlam Investments Multi-Manager has uniquely combined the use of fixed interest hedge funds, smooth bonus strategies and multi-asset class funds (local and offshore) to address this challenge.

Adam Bulkin, Head of Research at Sanlam Investments Multi-Manager (SIMM) – Sanlam Investments’ multi-manager - explains, “The goal is to achieve ‘asymmetry’; a balance of achieving the majority of the upside of a particular asset class, such as equities, while participating as little as possible in the downside of that asset class, and thereby controlling the downside and volatility in portfolios. We also seek alternative solutions for returns and portfolio growth. We’ve brought new thinking into the strategy and are using different ways, unique to our market, to generate high growth and low volatility.”

He said, in particular, the use of fixed interest hedge funds is an innovation that is working well. “Hedge funds offer high growth, with low volatility. The funds have delivered consistent benchmark-beating returns, but these can be controlled in a way that equity-focused growth assets cannot be.”

A blended view of SIMM’s hedge fund portfolio – which employs underlying fund managers such as Matrix Fund Managers, Terebinth Capital, Acumen Asset Management and Marble Rock Asset Management - shows that the hedge funds outperformed the ALSI and ALBI and delivered smooth annualised returns of around 14%, from August 2016 to May 2021.

The next key component applied to address the Living Annuity volatility issue is the smooth bonus strategy. “This strategy delivers strong asymmetry because it has the ability, through a multi-asset portfolio, to capture growth in equities and other risk assets, while at the same time smoothing the journey,” says Bulkin.

He said this is done by controlling volatility. “We put bonuses aside in good months and add them to returns in down months. An actuarial process that sits on top of the portfolio decides when the returns are high enough to reduce some of the bonus that is declared for the month. Then, when returns are low, when to take some of that reserve and provide it to investors. In this way, returns are smoothed out over time.”

The final component is the traditional multi-asset class funds. “Over time, almost all the underlying multi-asset funds in our portfolio have captured significantly more of the upside of markets returns than the downside of those markets, thereby achieving an asymmetric return profile to the upside and generating stable returns.”

Bulkin says underlying funds are chosen for their different but complementary fund management styles. “For instance, the PSG Flexible Fund provides a strong value underpin, combining very nicely with other flexible equity funds in the strategy to provide an overall flexible equity fund component that has managed to achieve strong growth and, again, that asymmetry of performance to the upside for which we aim.”

Offshore components are very important in terms of diversification and the way that the global component combines with the local component. “Global equity solutions have outperformed when local equities underperform, owing to the currency effect as typically the rand weakens in times of global market sell-offs.”

The Sanlam Investments Multi-Manager Living Annuity Strategy has delivered the targeted income for retirees and growth across all income requirements over the past year. SIMM has plans to add private markets to the strategy in the near future.