Smoothing out the retirement wrinkle

Smoothing out the retirement wrinkle

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While South Africa has a well-developed and sophisticated retirement savings industry, it is not designed to encourage the preservation of retirement funds when moving jobs.

With financial inclusion and long- term, sustainable steady returns top of mind, our investment philosophy is not to take big cyclical bets but to add value to the client over time.

Through this fund, it is our hope that more and more South Africans have the option to retire – or not – on their terms, just like the indomitable Betty White.

“The FNB Core Balanced Fund’s focus is simple: to provide a low-cost balanced fund that uses passive building blocks to ensure that performance is not eroded by high fees.”

When Betty White passed away, aged 99, the internet was filled with tributes to this beloved American actress and comedian. Among those witticisms attributed to Betty was this one: “Retirement is not in my vocabulary. They aren’t going to get rid of me that way.”

In the end, Betty was - as ever - true to her word. It was her choice to never spend a single day in retirement. But, for some, retiring may not even be an option. Many people around the world simply have no choice but to forgo a well- deserved rest from the day-to-day grind during their old age and must continue plugging away for as long as possible to try to fill the savings gap. This is a common reality in South Africa.

Our research colleagues have pointed out that at 14.65% of gross domestic product (according to World Bank figures), South Africa’s household savings rate is extremely low compared to global averages. While South Africa has a well-developed and sophisticated retirement savings industry, it is not designed to encourage the preservation of retirement funds when moving jobs. We know just how tempting it is to take that cash, thinking of debts to be settled, while promising ourselves that we’ll replace it some point in the future. Of course, more often than not, that point never arrives.

Fortunately, it’s not all doom and gloom since there are regulatory reforms in progress that aim to promote higher savings, expand retirement coverage to more employees, encourage better preservation and reduce the cost of retirement savings.

It’s against this backdrop that Ashburton Investments, in conjunction with FNB Wealth and Investments, developed the FNB Core Balanced Fund. The fund’s focus is simple: to provide a very low-cost balanced fund that uses passive building blocks so that performance is not eroded by high fees. This is critically important as compounding the low savings problem in South Africa is the relatively high costs associated with many retirement savings products. In fact, investors are often not aware of how detrimental high fees can be to an investment over time.

We developed this portfolio by examining industry trends, which show an ever-increasing demand for passively managed solutions at total investment costs (TICs) far below those of the current asset managers which dominate the South African balanced fund landscape.

With financial inclusion and long-term, sustainable steady returns top of mind, our investment philosophy is not to take big cyclical bets but to add value to the client over time. We use internal building blocks at zero fees to ensure that they pay the lowest possible cost while earning the highest possible returns. We target a total investment cost of 0.39% for the fund.

How does this work in practice?

To illustrate how the fund’s philosophy works, Figure 1 shows the performance of a R500 000 lump sum invested in the FNB Core Balanced Fund with a TIC of 0.39% versus an average balanced fund at a TIC of 1.30% (with all other factors being equal). Over
20 years, just due to the cost differential, this investment would outperform the industry fund by 19.79%, resulting in a lump sum of R3 580 696 on retirement, compared with the industry balanced fund’s performance of R2 989 106. That’s an additional R591 590 in the investor’s pocket.

Figure 1: Performance difference of R500,000 over 20 years

Figure 1 - Performance difference over 20 years

“The solution is inspired by our ambition to create financial solutions that truly benefit all South Africans.”

For investors looking for a long-term multi-asset investment providing inflation beating (CPI + 5%) and capital growth, a Regulation 28 fund (like the FNB Core Balanced Fund) is a good option since it spreads the investment - and therefore the risk - over various asset classes under the guidelines of Regulation 28. Below is the asset allocation of the fund, as at December 2021.


Offshore asset allocation

Our approach to adding value

The fund adds value in two ways. Firstly, clients save around 1% per annum in total investment costs compared to some of the well-known balanced funds in the market. We do this by using an active asset allocation strategy into a diversified range of core local and offshore passive investments. This approach brings together the benefits of an actively managed fund with the cost benefits and transparency of passive underlying building blocks.

By using index trackers, we are assured of getting benchmark returns in each of the asset classes, so there’s little risk of significantly underperforming the benchmark. Historically, outperforming the benchmark, specifically in the equity space, has proven to be difficult.

In recent years we’ve seen passive balanced funds growing in popularity as investors realise the important positive impact of compounded low costs on performance over the long term. Amid this market trend towards passive balanced funds, the FNB Core Balanced Fund gives clients the advantages of both active and passive investing in one product.

Secondly, the solution is inspired by our ambition to create financial solutions that truly benefit all South Africans. Through this fund, it is our hope that more and more South Africans have the option to retire – or not – on their terms, just like the indomitable Betty White.

 
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