The most compelling opportunities may lie beyond traditional markets. What if you could garner consistent investment growth while contributing to a child going to school? What if you could do this without feeling major market swings? Alternatives provide one possible means to do so.

Alternative investments – including private equity, infrastructure, natural resources and development finance – provide access to return streams that are often less correlated with listed equities and bonds. They introduce an additional source of diversification, growth and alpha into a portfolio while creating impactful opportunities to invest in our country’s advancement.

Alternatives are still somewhat untapped yet have become an increasingly important source of long-term value creation. Recently, equity markets have enjoyed an exceptional run, fuelled in part by the AI-driven rally. However, during the decade preceding this, alternatives delivered compelling returns while traditional local markets struggled to generate meaningful growth. As well as generating differentiated sources of return across market cycles, their performance can also be outstanding. For example, our newer Old Mutual Private Equity Fund V is delivering an internal rate of return of *over 40% on an annualised basis since its June 2020 inception; an exceptional outcome on any basis. 

Yet, despite their appeal, alternatives come with a challenge that many investors underestimate: the journey is rarely as smooth as the destination. But that can be changed. 

The J-curve: why the best investments can start slowly

Many alternative investments, particularly private equity, require patience. Capital is deployed in the early years, businesses are optimised and growth strategies are still taking shape, so there is often the familiar J-curve dip before returns accelerate as value is created and eventually realised.

Unlike listed markets, private assets are valued periodically rather than priced continuously, which means performance can appear disconnected from broader market movements. Let’s imagine, for example, that 50% of a portfolio was allocated to alternatives and those investments experienced the early-stage negative returns typical of a J-curve. If that allocation generated returns of -5% to -10%, investors could see a sudden -2.5% to -5% impact on their statements. For investors in traditional balanced funds, these early-stage losses are reflected immediately in portfolio returns. It would be natural for people to wonder what’s going on. 

The challenge is you need to work through that initial pain to get to the other side of the J-curve, where alternatives often generate exceptional returns. Exiting early could lock in losses. 

This is where smoothing creates a meaningful advantage. Rather than passing every short-term loss and gain directly through to investors, smoothing spreads returns over time. Stronger periods create reserves that help cushion weaker periods, which produce a more stable investment experience. The benefit extends beyond simply reducing volatility. Because the short-term impact of the J-curve is absorbed and released gradually, investors are less exposed to the sharp early drawdowns that often test confidence. This creates the time needed for underlying investments to mature and deliver their long-term value.

In effect, smoothing can change how investors experience risk. It allows investors to participate in the long-term growth potential of alternatives without having to absorb the full force of their short-term volatility.

That's really the big unlock that Smoothed Bonus offers – the ability to spread the short-term impact of the J-curve over time.

Sequencing risk: timing matters

Sequencing risk is often associated with retirement because the timing of market returns matters just as much as the returns themselves. Even investments with strong long-term potential can produce disappointing outcomes if a member retires during a period of market weakness. Lower asset values may be crystallised just as retirement income begins, reducing the capital available to generate future returns.

Smoothing helps mitigate this risk by reducing the impact of short-term market fluctuations. By creating a steadier path of returns, it helps reduce the impact on members from retiring at an unfortunate point in the market cycle, supporting the potential for better long-term retirement outcomes.

Creating capacity for more alternatives

Perhaps the greatest advantage of smoothing is that it dampens volatility, possibly allowing for greater exposure to alternatives.

Without smoothing, many portfolios must limit allocations to alternative assets because members may struggle to tolerate short-term market fluctuations. By absorbing those fluctuations over time, smoothing can create the capacity to invest more meaningfully in private markets while maintaining a more consistent investment experience.

This has allowed AGP to allocate approximately 15% exposure to alternatives (at June 2026) across local and global private markets, including private equity, infrastructure, natural resources and development finance – a materially higher allocation than many traditional balanced funds. These investments provide genuinely differentiated return streams that complement listed markets while broadening the portfolio's long-term sources of growth. 

Importantly, alternatives are not simply about enhancing returns. They can also provide access to investments that build the real economy, from infrastructure and renewable energy to education. Retirement investing isn’t only about accumulating wealth; it is also about investing in the country people hope to retire into. And building a better South Africa for emerging generations. For example, Old Mutual Alternative Investments offers investment vehicles that have supported 51 schools and close to 33 000 learners to date. It has also generated 8 594 GWh in renewable energy – the equivalent to 2.6 million households. This is how we help change individual member’s stories – and South Africa’s narrative.

The real value of smoothing is not that it reduces investment risk. It is that it may change how members experience it. By helping members navigate the temporary volatility associated with alternatives, smoothing can create confidence in long-term investment strategies with high-growth assets like alternatives at the fore. That, in turn, can enable greater exposure to private markets, stronger diversification and higher long-term growth potential.

Sources:

* Old Mutual Private Equity

** Old Mutual Smoothed Bonus Funds Responsible Investment Report 2025

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