Smoothed bonus funds aim to provide less volatility on your investment returns, so in market uncertainty they’re particularly attractive. But as Sam Zozi, Investment Consultant at Old Mutual explains, not all smoothed bonus funds are the same and neither are the providers.

Speaking at Old Mutual Corporate’s Q2 2021 Investment Report Back webinar, Zozi unpacked a few issues that corporates and investors should consider before deciding which fund to invest in.

Asset allocation

‘Many investors have long-term, real objectives in terms of the returns they seek. The underlying balanced fund is what will take you there. One of the most important things to look at is the strategic asset allocation of a smoothed bonus fund. It’s not the same across all funds.’

Guarantee levels

Most smoothed bonus funds come with built-in guarantee levels. Old Mutual’s range has a choice of four, based on the risk level you’re most comfortable with. This is another area where offerings differ, says Zozi. ‘Check the fine print,’ he advises. ‘Does the guarantee level apply to both the capital and the bonuses? Some providers have one guarantee for capital and another for bonuses declared, whereas others apply the same guarantee to both. I’m not saying that one is right and the other wrong, but you do need to understand the implications of both scenarios.’

Track record

As with all investments, one of the crucial tests for any fund is time in the game. How long has the fund been running? How has it performed over the long term, not just the past year or two? Who’s making the investment decisions? ‘You need to look at things like the experience of the team that’s running the smoothed bonus fund, and at their track record,’ he warns.

Fund size

Related to a fund’s track record is its size. ‘This is especially important with smoothed bonus funds where a larger fund is better optimised to achieve reasonable cross-subsidisation between investors,’ he explains. ‘If a smoothed bonus fund becomes too small, there can be unintended outcomes in terms of the management of the portfolio.’

Costs

Investors often ask how the costs of a smoothed bonus fund compare to those of a typical balanced fund. ‘The cost of an investment is a very important consideration,’ he says, ‘especially in a long-term investment where it can compound over time. But you also have to look at cost from a holistic point of view.’ For Zozi, the question is less about cost and more about value.

‘Consider our CoreGrowth 100 portfolio,’ he says. ‘When you exit the portfolio through a guaranteed benefit event, it guarantees that you will get 100% of your benefit paid out. The alternative might be a market-linked cash portfolio, which also gives you 100% protection. The difference is that the expected long-term returns on a typical money-market portfolio is about CPI +1%, while CoreGrowth 100 targets CPI +3% over the long term.’

Performance

While the fund’s performance is important, Zozi recommends seeing it as part of the overall picture. ‘I’ve seen investors rush to look at performance ranking tables, and that’s good. But I believe it should be the final part of the process. And while you’re looking at performance, you need to look at the medium and long terms. With funds like these, anything can happen in the short term,’ he says.