What is a Smoothed Bonus Fund?

Smoothed Bonus Funds (SBFs) are long-term investment portfolios that use smoothing to target the distribution of stable, inflation-beating returns to investors over the longer term (i.e. a period in excess of ten years) while significantly reducing the volatility associated with market-linked investments. These Funds are primarily aimed at risk averse investors and offer various levels of guarantees on both capital and returns.

The underlying investment portfolio that SBFs invest in range from conservative to aggressive balanced funds, depending on their exposure to growth assets such as equity and property. These portfolios usually provide exposure to local and global investment markets as well as alternative assets, such as private equity, natural resources, infrastructure and/or development finance, that meet Environmental, Social and Governance (ESG) related factors.

How does a Smoothed Bonus Fund work?

SBFs aim to provide the investor with smoothing throughout his or her journey to retirement, by catering for both growth and protection of capital.

As the portfolio grows, excess returns then flow into a Bonus Smoothing Reserve (BSR), whereby the BSR is used as a top-up to the portfolio during low/negative investment periods called market downturn. This process is called smoothing. This ensures that investors experience consistent growth, while their capital and returns are protected from any losses during periods when markets crash. From a risk-return perspective, smoothed bonus funds offer similar returns to market-linked funds over the long-term, yet reduce the investors risk significantly.

This provides clients with peace of mind, because they know that retirement is possible at any stage without the fear of market-related losses.

The benefits of smoothing include:

• Reduced exposure to the extreme ups and downs of investing in the stock market in the shorter term.
• Reduced risk of investing in and disinvesting from the market at the wrong time.

Why Smoothed Bonus Funds are useful

The purpose of saving for one’s retirement is to try to ensure that you are able to maintain a reasonable standard of living after you have retired and are no longer gainfully employed. In order to achieve this goal, it is important that the returns earned on retirement fund savings grow at a rate that exceeds inflation. Capital preservation also becomes key as the retirement date draws closer. While a market-linked balanced fund is likely to provide real returns over the longer term, these do not provide any form of guaranteed capital protection and a retiree could be faced with a significant reduction in retirement savings if there is a market correction shortly before an individuals’ retirement date.

With investment (the possibility of a loss occurring at any point in time) and longevity risk (the possibility of outliving your money) being two main factors of concern, SBFs protect capital at the various levels of guarantees while limited downside and provide inflation beating returns over the long- term. Overall, the stability of SBF, through the dual objective of growth and risk management, makes them more attractive for investors saving towards and in retirement. In addition, SBF offer similar returns to that of market-linked funds, with protective measures in place.

Why fully risk being in markets without protection when you don’t need to? Yes, other market -linked funds might provide for better upside when markets do well, however, they cannot prevent or protect your investment from downside when markets crash. Is it known when the next market crash will be?

What happened in 2020?

COVID-19!!! With an unexpected outbreak of the virus, both local and global investment markets dropped due to sell offs of assets that occurred globally. The Johannesburg Stock Exchange (JSE) All Share Index (ALSI) and the MSCI All Country World Index declined by over 20% in quarter 1 of 2020.
Market-linked portfolios would have felt the full effect of this reduction. SBF assets would also have been negatively impacted by the market downfall but their investors would have been somewhat safeguarded against this by the BSR and the guarantees attached to the SBF. This is an example of how SBFs protect investors’ capital at the point of a market downturn/crash.

A member of a retirement fund invested in a balanced portfolio who reached retirement age or got retrenched or died before the markets rebounded would have lost up to 20% or more of their retirement savings when they withdrew. This unfortunately has a lasting impact on the remainder of their life, as they would then receive lower pension/income than expected, even though the markets later rebounded. For retrenched members (which is common during financial crisis), the loss in retirement savings would be exacerbated by the hardship of losing a job.

The markets did recover somewhat during the remainder of 2020 and market-linked funds would have experienced the full impact of this improvement. This recovery unfortunately will not be enjoyed by those members who retired. Further, these active members whose funds have recovered may unfortunately be affected by another financial crisis when their time to retire comes. The bonuses allocated to SBF investors would not have fully reflected this upswing as the BSR was being replenished by the excess returns.

Who should invest in a Smoothed Bonus Fund?

Retirement funds are increasingly choosing smoothed bonus portfolios as the default investment option for members who do not want to make their own investment choice.
Both pre-retirement investors in group savings products such as pension/provident funds, and individuals in life endowments/retirement annuities should can make use of SBFs. These funds can also be used as a life stage investment options, where a pension fund starts with a lower guarantee for the employee to maximize their returns earned, while moving to a higher guarantee option to protect those earnings 5-7 years before retirement.
When nearing retirement, the need for protecting your capital increases as there is less time for market recovery in the event of market drops such as that experienced in Q1 of 2020. Thus, the need to de-risk and increase guarantee levels as retirement draws nearer.
Studies show that smoothed bonus funds are a necessary before and after retirement (for living annuities), as poor returns and market declines/crashes could permanently damage capital needed to support future pension income. Smoothed Bonus funds serve these investors well, as they provide inflation-beating growth, yet reduce volatility through smoothing and limit downside risk.

What does Old Mutual offer?

Old Mutual Namibia has two SBF products, namely the Absolute Growth Portfolio (AGP) and the Core Growth Portfolio (CGP). AGP offers the choice of a 50% or an 80% capital guarantee while CGP offers the choice of a 90% or a 100% capital guarantee. CGP is a relatively conservative SBF with a 60% exposure to growth assets while AGP has a growth asset exposure of 80%. These funds are envisioned to cater for various investor needs, and ideally positioned for medium- to long-term conservative investors that seek a capital protection along with growth asset exposure to beat inflation.

You can also obtain more information about SBF and CGP from your Old Mutual Personal Financial Adviser or broker, or by calling or send an email the details below.

Old Mutual Corporate:
Tel: +264 61 299 3227
Email: NAM-CSDistribution@oldmutual.com