Post-retirement investing in a challenging market

Coronation Fund Managers has cautioned investors seeking both immediate income and long-term capital growth, specifically those in retirement, to pay special heed as the investment environment grows cloudier.

According to Pieter Koekemoer, head of personal investments at Coronation, it's critical that retirees have a well-constructed portfolio with enough exposure to risk assets to achieve reasonable real growth over time, but not so much that a near-term market correction will impair their capital base.

"Between 2008 and 2011, we warned that retirement funding portfolios were too conservative and needed more exposure to growth assets. In recent years, however, investors have taken on much more risk," says Koekemoer.

Koekemoer expressed concern about the strong trend among post-retirement investors to invest in multi-asset funds with large equity allocations (the typical Regulation 28-compliant balanced fund). These high-equity funds are typically not specifically managed with post-retirement clients in mind, but rather for the build up to retirement.

“While traditional balanced funds have generated excess returns over the past six years in a relatively benign environment, we fear that some retired clients may now be too complacent about the actual risks in these funds. A market slump at the wrong time can have a negative, permanent impact on the retired investor’s standard of living." explains Koekemoer.

Key considerations for post-retirement investors

For investors who are retiring, or have retired recently, a more appropriate consideration is to invest in an income and growth fund (lower or moderate equity multi-asset fund) that explicitly aims to reduce downside risk (protect capital) in the shorter term, says Koekemoer.

He adds that if a client’s real retirement capital remains intact after the first ten years of retirement, it is very likely that their real living standards will be sustained for the rest of their life. Selecting a prudent initial drawdown rate (percentage of income you draw from your retirement capital annually) therefore becomes crucial. “Market valuations at the time of retirement should play a key role in deciding on such a drawdown rate,” says Koekemoer. Another good reference point is the age-appropriate annuity rate quoted by life companies on an escalating guaranteed annuity. For relatively healthy retirees in their early sixties, a prudent initial drawdown rate in the current environment is believed to be between 4% and 5%, compared with the average drawdown rate of 6.59%¹ in South African living annuities in 2014. This was virtually unchanged from 2013 (6.63%¹), unfortunately ending a welcome period of declining drawdown rates.

Coronation has cautioned for some time that an extended period of lower returns lies ahead. “Despite some recent declines, equity valuations in general remain full - with the exception of some parts of emerging markets - and interest rates are still at multi-decade lows, which may result in lower future investment returns,” explains Charles de Kock, co-manager of Coronation’s two income and growth funds, Capital Plus and Balanced Defensive². According to him it will be much more difficult to achieve large margins above inflation in this low growth, low interest rate world.

He adds that while Coronation continues to identify strong long-term investment opportunities, in a fund such as Capital Plus (which is ideal for investors in the first half of their retirement), they are as serious about capital protection as they are about beating inflation. “Put options and other forms of portfolio insurance therefore form a permanent feature in the fund in order to reduce the impact of possible market declines,” explains de Kock.

1 Source: Association for Saving and Investment SA (Asisa)

2 The Coronation Balanced Defensive Fund and Coronation Capital Plus Fund are Coronation’s flagship income and growth funds. Balanced Defensive has been a top-performing conservative fund in South Africa since its inception in February 2007 and over the past five years. It has not suffered capital losses over any 12-month period over its more than eight-year history. Capital Plus has a higher allocation to growth assets (60%), making it an ideal portfolio for investors in the first half of retirement. This fund has delivered solid inflation-beating returns over the long term, outperforming inflation by around 8% p.a. since its launch in July 2001. Capital Plus has produced positive returns over rolling 12-month periods more than 90% of the time.

Disclaimer:

​Any information being provided herein (the “Information”) is not designed for use in any jurisdiction or location where the publication or availability of the Information would be contrary to local law or regulation. If you have access to the Information it is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction and it is recommended an investor first obtain appropriate legal, tax, investment or other professional advice prior to acting upon the Information. Coronation Asset Management (Pty) Limited is an authorised Financial Services Provider regulated by the Financial Services Board of South Africa. Coronation Asset Management (Pty) Limited is a subsidiary company of Coronation Fund Managers Ltd, a company incorporated in South Africa and listed on the JSE (ISIN: ZAE000047353). The Information is for information purposes only and does not constitute or form part of any offer to the public to issue or sell, or any solicitation of any offer to subscribe for or purchase an investment, nor shall it or the fact of its distribution form the basis of, or be relied upon in connection with, any contract for investment. Unit trusts should be considered a medium- to long-term investment. The value of units may go down as well as up, and is therefore not guaranteed. Past performance is not necessarily an indication of future performance. Note that individual investor performance may differ as a result of the actual investment date, the date of reinvestment of distributions and dividend withholding tax, where applicable. Where foreign securities are included in a fund it may be exposed to macroeconomic, settlement, political, tax, reporting or illiquidity risk factors that may be different to similar investments in the South African markets. Fluctuations or movements in exchange rates may cause the value of underlying investments to go up or down. Coronation Management Company (RF) (Pty) Ltd is a Collective Investment Schemes Manager approved by the Financial Services Board in terms of the Collective Investment Schemes Control Act. Unit trusts are traded at ruling prices set on every trading day. Unit trusts are allowed to engage in scrip lending and borrowing. Coronation Fund Managers Limited is a Full member of the Association for Savings & Investment SA (ASISA).Opinions expressed in this document may be changed without notice at any time after publication. Nothing in this document shall constitute advice on the merits of buying and selling an investment.