Investment markets fell to historic lows in March 2020, with the Johannesburg Stock Exchange’s All Share Index dropping an incredible 34% in response to the Covid-19 pandemic. Even Old Mutual’s flagship Absolute Growth Portfolios (AGP) declared a negative bonus for the first time in its history.

In the 12 months since, markets have recovered and some balanced funds are reporting growth of 30%. And yet AGP returned 3%.

To understand this gap, it’s important to step back and look at the bigger picture, says Fred van der Vyver, Old Mutual’s Head of Group Retirement and Guaranteed Solutions. ‘The effects of Covid-19 in the early months of 2020 were catastrophic for investment markets, and typical balanced funds lost 15% of their value,’ he says. ‘However, AGP delivered positive growth of 1.5% over the same period.’

Then markets recovered for the next 12 months as South Africa’s hard lockdown eased and news emerged of the quicker-than-expected development of Covid-19 vaccines.

‘While AGP returned only 3% at a time when some other balanced funds improved by 30%, AGP’s underlying funds actually performed similarly to typical balanced funds,’ says Van der Vyver. Putting the performances in mathematical perspective, 100 minus 15% (to end March 2020) plus 30% (to end March 2021) arrives at 110 for a typical balanced fund – with a significant V-shaped dip in the middle. AGP, by comparison, followed a fairly steady return path and went from 100 to 101 (end March 2020) to 103 (end March 2021).

‘The bottom line therefore is not to compare 30% and 3%,’ says Van der Vyver. ‘This ignores the significant 15% drop that preceded the 30% growth.’

Preserving the reserves

Old Mutual’s AGP’s reserves recovered to between 5% and 10% following last year’s dramatic recovery. Van der Vyver explains that this is the reason for the 7% difference in investment growth between typical balanced funds and AGP over the period since the beginning of 2020 – it represents the fund growth that was withheld to be added to the AGP fund’s reserves.

Those reserves are absolutely crucial to give investors peace of mind. ‘The protection you enjoy in a Smoothed Bonus portfolio is funded by its reserves,’ Van der Vyver explains. ‘We build those Bonus Smoothing Reserves (BSR) by withholding some returns during the good times to be able to boost returns when the portfolio performs badly – as it did, quite spectacularly, in March 2020. By maintaining AGP’s reserves, we’re protecting investors against the next market catastrophe.

‘As a result of our smoothing principles and underlying investment strategy, our reserves are much healthier than those of other smoothed bonus funds,’ says Van der Vyver. ‘This bodes very well for the bonus declarations we can expect from AGP in the future.’

A long-term outlook

Investing – and retirement investing especially – is a long-term endeavour that should be viewed, and implemented, over much longer periods than one good or bad quarter.

‘If you look only at the results of the past year or 15 months, you won’t get the whole picture,’ says Van der Vyver. ‘If you look over the last ten years, though, you’ll see that AGP has grown by about 10.8% per year along with a nice, smooth upward line on the chart.

‘During the same period, the average balanced fund has gone up and down – through the NeneGate years, and then through Covid-19. Some of our high-profile competitors delivered a very bumpy growth line as a result.’

So what does the future hold for long-term investors? Van der Vyver has run the numbers and found that if the markets were to, say, drop 20% from their current levels, a typical balanced fund could lose 20% of its value. AGP, however, would return a small positive bonus while absorbing the fall in its BSR. He says, ‘Now you tell me: which would you prefer when you’re not 100% secure in your job, or if you’re about to retire?’

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