MoneyMarketing September 2020

DANIE VAN ZYL Head of the Smooth Bonus Centre of Excellence, Sanlam Corporate

A volatile investment can be compared to a wave with peaks and troughs, where the size of the wave represents volatility. A bigger wave carries more energy.

You want to reduce or avoid volatility because it could be uncomfortable, or even dangerous, similar to rough waves on the ocean.

Removing volatility by investing in cash is similar to removing energy; if you reduce risk or growth assets, longterm performance can suffer.

Can we possibly smooth volatility in a clever way, without putting the long-run sustainability or growth potential of the portfolio at risk? The answer is yes!

At Sanlam Corporate we have been expertly managing volatility for retirement fund members for over 50 years. During this time, thousands of retirement fund members have been able to face retirement without having to experience a negative return due to a market downturn – and there have been many of these market downturns along the way.

Our range of smoothed bonus portfolios are designed to provide members with more stable, predictable returns than they can expect from an average balanced fund. It is for this reason that the Sanlam Umbrella Fund extensively utilises these portfolios in its default strategies, including:

The crucial years leading up to a member’s retirement

During this time, members have accumulated their biggest retirement nest egg and do not want to be exposed to negative returns just before retirement. At the same time, members understand that they simply cannot miss out on earning decent market-related returns by being too conservatively invested. Sanlam’s house view is to use a smoothed bonus portfolio as the final stage in our lifestage strategies.

As the default portfolio for retirement funds with a large blue-collar membership

These members are vulnerable to economic downturns and potential layoffs and these funds are often characterised by significant member turnover. These members often have industry-specific skills and they find it difficult to translate these skills to employment opportunities in other industries, potentially leading to extended periods of unemployment. Such members often rely on their accumulated retirement savings during these times and do not want to see their fund value decreasing in times of economic upheaval. A portfolio that combines smoothing and protection on benefit payment events (where a member leaves a fund) is often popular with these members.

As part of a living annuity strategy for members post retirement

These members are susceptible to negative returns early in retirement when they start making regular withdrawals for retirement income. This sequence of return risk has the potential to significantly reduce the member’s likelihood of having a successful retirement outcome. At the same time, members cannot afford to be too conservatively invested as they still have a 20- to 30-year investment horizon ahead of them. A smoothed bonus portfolio, either on its own, or in combination with more aggressive portfolios, can significantly reduce the risks that these members face.

The benefit of using Sanlam’s smoothed bonus portfolios can easily be seen when considering how one of our portfolios, the Stable Bonus Fund, protected member’s savings during the last two market downturns.

Members retiring during March 2020 had the benefit of knowing that their fund value would not decrease due to the COVID-19 linked market downturn.

Additionally, Sanlam was not forced by either of the above market crises into a position where we needed to close our existing portfolios / bonus series.

The above was achieved without sacrificing significant long-term returns. This can be seen from the graph below, which compares the returns of our Stable Bonus Portfolio with the AF Global LMW median (A survey representing an average South African balanced fund).

The end result is that a member invested in the Stable Bonus Portfolio, as well as many others investing in any of our smoothed bonus portfolios, could face retirement with confidence, knowing their retirement savings survived the Great Lockdown and are not languishing in quarantine.

Sanlam corporate smoothed bonus range for retirement funds

Sanlam Corporate has a long history of providing smoothed bonus portfolios – the first to be launched were the Alpha Bonus Portfolios more than 50 years ago. These portfolios closed and clients transferred into the Stable Bonus Portfolio in 2010. We were the first in South Africa to launch a smoothed bonus portfolio which has exclusively black underlying asset managers, the Progressive Smooth Bonus Fund.