You probably don’t remember what you were doing on 5 December 2017, the day before CEO Markus Jooste dropped the ‘accounting irregularities’ bombshell that saw Steinhoff’s share price plummet from R56 to R6. Nor do you recall where you were on 15 August 2012 (the day before the Marikana massacre), on 8 December 2015 (the day before Nenegate unravelled the national economy), or in January 2020 (before you’d heard the word ‘coronavirus’).

Yet those landmark events have had a shock effect on investment markets – and they’ve been coming thick and fast in recent months. ‘There’s been so much political, social and economic uncertainty,’ says Robin McLaurie, Head of Retail Distribution: Smoothed Bonus Funds at Old Mutual Corporate. ‘When we speak to clients, the word that keeps coming up is “volatility”.’

Old Mutual’s Smoothed Bonus funds – including the Old Mutual Absolute Smooth Growth Portfolio, CoreGrowth 100 and CoreGrowth 90 – promise to ride out exactly those kinds of volatility bumps, delivering steady, dependable returns despite the market jitters.

Minimising investment ups and downs

Asked if these funds are delivering on that promise in these pandemic-pummelled markets, McLaurie’s replies, ‘The simple answer is yes.’ He backs this up with a range of graphs and charts that illustrate how smoothed bonus funds have been delivering returns comparable to typical balanced funds, but with far less volatility.

But the story is obviously a lot more complicated than that. ‘Clients’ first question is always what sort of investment returns they can expect in the current market,’ McLaurie says. ‘But as financial specialists we also need to educate them about market volatility. Our portfolios are built on the basis of growth, targeting CPI+6.2% to CPI+4.8% gross return, and that certainly comes through in our five-year return numbers. Yet that’s just one side of the story. The other side is protecting our clients’ investments as much as possible.’

In other words, investing is partly about growing your wealth as much as possible; but – and here’s where the volatility comes into play – it’s just as important not to lose that wealth.

‘That’s where figures like annualised volatility become important,’ says McLaurie. ‘A typical balanced fund will offer annual returns of 7.1%, with annualised volatility of 9.9% as at the end of June 2021. Our Absolute Smooth Growth Portfolio, meanwhile, offers comparable returns of 6.7% per annum, but with low annualised volatility of just 2.7%.’

Making sense of the numbers

Even if you are not a graphs-and-percentages person, it’s important that investors take note of these numbers. As McLaurie explains, ‘This is the kicker. If you have invested in a living annuity and are getting a monthly income from it, you should draw income off either a flat base – in other words, the capital has to be the same as it was last month – or a growing base. You can measure that by looking at the percentage of negative months in the fund.’

You will find that investors in a typical balanced fund have, over a period of five years, drawn off a negative base 33.3% of the time. That means that they have been selling more units for at least 19 of the 60 months to be able to get the same income. Naturally it will eat into your capital.

Compare those numbers to an investment like the Absolute Smooth Growth Portfolio, where investors have seen just 1.7% negative months. That’s the smoothing mechanism at work.

‘Smoothing provides investors with a shock absorber,’ McLaurie concludes. ‘And that’s part of the emotional management we do for our clients. I always say that financial advisers aren’t just advisers. They’re investor psychologists. They have to manage their clients through the emotional rollercoaster markets sometimes present.’

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