IS YOUR RETIREMENT PORTFOLIO INFLATION-PROOF?

Insight from Coronation on how investors near or in retirement can protect themselves through the treacherous times that lie ahead.

The environment facing long-term investors is treacherous. We are in uncharted waters for our generation.

At the same time, we are witness to an unprecedented monetary experiment, coupled with a relentless increase in indebtedness around the world. The bill to this experiment will have to be paid back at some point. In the absence of extraordinary growth, taxes and financial repression (in the form of higher prices and lower interest rates) will be the key solutions.

As a retiree, the threat of an increase in your inflation rate (off a historically low base), combined with a low expected return from cash, should be enough reason to revisit your investment portfolio to ensure you have sufficient protection against these risks.

CASH OR NEAR-CASH FUNDS HAVE BEEN THE DARLING OVER THE LAST FEW YEARS

In the recent past, South Africans were in the fortunate position of saving in a market where cash and fixed income assets provided yields in excess of inflation – quite unique in a global context. Together with underwhelming returns from domestic growth assets, this has meant that in the five years to end May 2020, cash or near-cash funds (lower risk income and money market funds) have outperformed the average South African balanced fund, as well as the average

South African equity fund. The response from investors was to de-risk portfolios by switching from long-term funds with more growth assets into short-term funds with only fixed-interest assets as they settled for the certainty of achieving reasonable real returns without having exposure to more volatile assets. This strategy turned out to work thus far.

TIME TO RECALIBRATE EXPECTATIONS

However, since the start of 2020, the South African Reserve Bank has cut the repo rate by a cumulative 275 basis points. This was to provide relief to an already struggling economy, exacerbated by the lockdowns imposed due to the COVID-19 pandemic. It has been at the expense of cash investors. When adjusting for tax on interest, investors in cash can expect to earn net returns below the current inflation rate. This can also be viewed as a form of financial repression when considering how long savers will effectively be taxed through negative real interest rates.

WHAT ARE RETIRED INVESTORS TO DO?

Now more than ever, inflation protection should be a priority when constructing your long-term investment portfolio, meaning that real assets should form the cornerstone thereof. Real assets consist of select growth assets, such as equities and property (that have pricing power and that can grow earnings at or above inflation), or traditional inflation-hedged asset classes, such as inflation-linked bonds and certain precious metals.

Practically, this requires retirees to invest in a fund that has the correct mandate and allows the fund manager to diversify exposure into the most appropriate combination of real assets. At Coronation, we deliberately construct robust balanced portfolios that incorporate a wide variety of asset classes in order to achieve inflation-beating returns over the long term. The Coronation Balanced Defensive and Capital Plus funds are our flagship multi-asset funds that are managed specifically with the retiree in mind.

To find out more about the Coronation Balanced Defensive and Capital Plus funds, visit www.coronation.com or speak to your financial adviser.