By Rocco Carr, Business Development Manager
During volatile periods like the last four years, investors have battled to sustain their income levels from living annuities, highlighting the serious need for something more stable.
The dilemma is that lower risk funds, like income funds, are suitable for stability at a fair return, but over the long term these funds cannot always keep pace with inflation. Thus, to get a fund with low volatility without taking away the ability to get returns of inflation plus 5% is a serious issue.
Glacier recently made the Sanlam Monthly Bonus Fund available on the platform and this fund offers a perfect solution for the dilemma mentioned. The fund is only available for retirement products and can therefore be used in living annuities to reduce the volatility and to enhance the positive experience of the client.
Sanlam Monthly Bonus Fund
This fund, which has certain guarantees embedded, declares monthly bonuses which fully vest and can therefore never be taken away. Furthermore, the fund cannot declare a negative bonus, so the worst possible return during a very poor month is a zero bonus. An investor will therefore never experience the market volatility normally associated with more aggressive portfolios like balanced funds, within the living annuity.
When dealing with a fund like this, people often think that the fund will have mediocre returns over time and they prefer to use something more aggressive. This, however, is far from reality. The fund is managed like a fund in the medium equity category with a maximum of 60% in equities. So this allows for long-term returns of inflation plus four to six percent. The fund will also be managed according to Regulation 28 so it is safe to be used within the retirement space.
During positive months, the fund trims off some of its excess returns which it then uses to enhance returns during poor months. This results in a smoothed return with almost no volatility. However, during strong markets, the fund has actually managed to deliver strong returns with even 22% during 2006.
The fund is negatively correlated with other balanced funds and it can therefore be used effectively as a diversifier in a living annuity. By combining this fund with a medium-risk portfolio you do not detract from the long-term returns but you reduce the volatility quite sharply.
Since 2006 until the end of 2017, the Sanlam Monthly Bonus Fund has outperformed both the multi-asset medium and high equity categories by quite some margin, and this with almost no short-term volatility. The fund therefore allows the investor to have the best of both worlds with market-related returns and no negative months.
Combining the Sanlam Monthly Bonus Fund with the ILLA and ILLI
When combining a living annuity with the Glacier Investment-Linked Lifetime Income Plan (ILLI), the Monthly Bonus Fund should be incorporated into the living annuity portfolio to reduce volatility for the client. It might be prudent to use a moderate aggressive portfolio in the ILLI where the units are guaranteed, while reducing the risk on the living annuity side with a combination of say, a moderate risk portfolio and the Monthly Bonus Fund. The split will depend on the risk profile of the client but a combination does reduce volatility without detracting from long-term returns. Lower volatility in a living annuity protects the capital during tough periods where more units normally need to be sold to cover the income.
Helping your clients achieve a sustainable retirement income
With the addition of the Sanlam Monthly Bonus Fund, Glacier now offers retirement alternatives which can keep up with market returns over time while offering guarantees within the structures that we offer. This is a further example of the flexibility and choice on the Glacier platform.