In Q2 2023, South African business confidence plummeted to its lowest level since 2020 during the Covid-19 pandemic. It then inched up slightly in Q3 due to a slight improvement in loadshedding.

However, the fact remains that business and investor confidence has rarely been this weak. There are still headwinds to consider, such as stubborn inflation, the high cost of living and a weak currency.

“Businesses have been under a lot of pressure – borrowing costs have increased, and we may be in a high-interest-rate cycle for longer than anticipated,” says Marvin Nair, Head of Smoothed Bonus & Investment Strategy at Old Mutual.

Investors are jittery due to both persistently low market returns and global volatility –navigating uncertainty has become the new normal. 

“Your investments are meant to set you up for the future, so it can be difficult to watch the ups and downs,” says Nair. “The JSE’s All Share Index has been in the red this year, although it’s consistently delivered inflation-beating growth over the long term.”

He says there have been fresh market jitters on the back of the US Federal Reserve suggesting that rates will remain higher for longer. “South Africa follows a similar path and knowing that high interest rates may be sustained a little longer will be a bitter pill to swallow.”

It’s not easy to take a long-term view of one’s investments, especially when stocks are fluctuating into the red, but Nair says it’s important that investors understand the value of remaining invested in growth assets.

“This will ultimately give you the returns you need for your retirement, despite short-term volatility,” he says. “Taking a short-term view of investments generally results in the destruction of value, so disinvesting during a downturn and moving into conservative assets is not the solution.”

That said, even aggressive investors require some stability during uncertain times, and asset managers are under increasing pressure to provide some level of predictability. Old Mutual’s Smoothed Bonus Funds are uniquely positioned to provide stable yet strong, long-term returns – but how do they achieve this?

Understanding smoothed bonus products

Smoothed bonus products are designed to position your portfolio to outperform inflation in the long run through high growth asset exposure while “smoothing out” the volatile returns of the underlying assets. By managing short-term volatility in this way, asset managers can provide investors with a measure of certainty.

Old Mutual tailors its portfolios specifically to accommodate every type of investor, from the most aggressive to the most conservative. More conservative investors may simply be risk-averse, or close to retirement and therefore unable to take on the amount of risk that would be palatable to a younger investor.

“Within the conservative risk pool, we have our Core Growth Portfolios, and within the aggressive risk pool, we have our Absolute Growth Portfolios.”

The Core Growth Portfolios exhibits 61% exposure to growth assets, while the Absolute Growth Portfolios exhibit 83% exposure to growth assets.

“The Core Growth Portfolios provide a less volatile outcome for the client, with the underlying portfolio targeting a return of around CPI + 3.8% to 5.8% a year on a gross basis,” Nair explains. “Once the smoothing methodology is applied to reduce the volatility of the underlying portfolio, an investor can also decide if they want to opt for 90% or 100% guaranteed protection – for example, if they invest R100 with 90% protection, their benefit on exit will not be lower than R90, should they exit the fund due to a benefit event such as retirement, resignation, disablement and so on.”

Old Mutual’s Absolute Growth Portfolios, which exhibit 83% growth asset exposure, have an underlying portfolio which aims to achieve a targeted return of around the CPI +5.2% to 7.2% a year on a gross basis. An investor can then opt for a long-term smoothed return of either CPI +4.5% to 6.5% or +5% to 7% (net of capital charge), depending on their risk appetite, which is determined by the options of either 50% (AGP 50/ Smooth) or 80% (AGP 80/ Stable) of fund-value guarantees respectively.

“In these cases, a client investing R100 will leave with not less than R50 or R80, as a result of a benefit event, depending on the selection made,” he says.

“The advantage of all these funds is that they generate growth through growth asset exposure in the long term, but investors are protected against downturns in the short and medium terms – even during protracted market downturns.”

Nair says the funds have performed well, with returns across the board above 10% per annum over the long-term, despite the tough market environment. “Even the more conservative portfolios have done well, which speaks to strong returns in the bond market – and of course, given rate hikes, cash has delivered strong returns in the recent past,” he notes.

Time in the market

As with other Old Mutual investment products, the Smoothed Bonus Funds take a long-term view, with the aim of providing clients with a comfortable retirement.

“A client needs as much exposure to growth as possible to ensure they’re getting the return they need over their retirement savings journey, but at the same time, short-term volatility and medium- to long-term downturns have to be managed,” says Nair.

“Our portfolios are well geared to provide both growth and protection against unforeseen events. Ultimately, investor success is about time in the market, not timing the market – and a disciplined investor can feel confident that our Smoothed Bonus Funds will provide the level of predictability they need to help them prepare for their golden years.”

Corporate decision-makers should consider these Smoothed Bonus Funds as a valuable tool in achieving financial security and peace of mind for their clients.

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