Your Pension is Getting Smoked….

High-profile economists and wealth managers are, for good reason, putting all their weight behind offshore investing, but the reality is that everyone’s circumstances need to be assessed individually and that there is still in excess of 1.9 Trillion Rands* of privately administered pension funds in South Africa that cannot be ignored. Yes, we are working with one hand tied behind our backs with strict investment restrictions imposed such as a maximum of 30% allowed to be invested offshore but that doesn’t mean we should wave a white flag and give up. On the contrary! It is a call to action, to get off our butts, take control, and seek the best advice to ensure our offshore, as well as local investments, have the best chance of growing consistently with inflation-beating returns.

Maybe it is because returns have been so poor that advisors are not necessarily having the hard conversations and making the bold decisions they are paid to do? Or maybe they just don’t care anymore and are fat and lazy from earning fees and doing no work? It feels like big-name asset managers are being selected without much thought, and with a hope and a prayer that over the long term their returns will normalize. How has that been working for you? It certainly hasn’t been working well for the daily new clients we see who are mortified with the harsh reality that they won’t have enough savings for retirement.

The fact that interest rates have come down so low and so fast is also a massive consideration as money market funds, returning 7% not so long ago, are now paying around 4.5% so sitting in cash is no longer the path of least resistance.

So, what needs to be done? Well firstly, take some time to look at your investments and challenge your current financial advisor. If you don’t get a satisfactory answer, then consult with another advisor and move. Don’t let emotions cloud your financial decisions. Also find an adviser that has a transparent fee structure and looks at the best way to hold assets for tax efficiency, asset protection, estate planning and succession planning.

I find that a combination of a good financial advisor and a discretionary fund manager is a strong combination, each focusing on their respective strengths. This is the Carrick way, which results in a logical financial plan and a deep understanding of your overall risk profile and return expectations with an investment portfolio designed to fit. This separation of duties really allows Carrick to spend more time with its clients to ensure we truly understand your needs and adjust your financial plans accordingly and leaves the daily asset management to the professionals with their fingers on the market pulse.

Another common mistake I see is investors being too aligned with one asset manager, one investment style and one house view. The diversification benefits of multi-management improve the overall risk metrics of an investment strategy which is where you want to be – equal or lower risk with higher return. It is important to remember that it is not just a good return that is important but how that return is achieved.

The purpose of diversification is that when one investment goes down or is not doing well, you are insulated from the result because of the others you have in place. Spreading your assets among investment types, styles, and markets is one of the few time-tested strategies for investors with long-term financial goals. A well-diversified portfolio helps reduce your exposure to the downside risks of individual holdings or strategies. Just because an investment type or style outperforms one year, there is no guarantee that it will outperform the next. Stay diversified!

Coming back to the topic of investment returns, the table below is a summary of two of the largest South African asset managers returns compared to Carrick Wealth’s Balanced solution, as well as the average return of all the asset managers in that category. The table demonstrates just how poor recent returns have been for so many people, but also that decent returns have been achievable, even through the recent market sell-off and continued uncertainty. I have included the cost of the various solutions and the maximum drawdown to get a sense of the risk associated with these solutions.

I also find the ongoing debate between active and passive managers unnecessary. The Carrick Investment committee believe that markets are inefficient over certain time periods and that active managers add significant value over these periods. We are agnostic to active vs passive and believe in having a combination of both. The key is to have a financial advisor and asset management team that is nimble enough to allocate between active and passive as well as the transition between asset classes.

Historic Investment Returns till 31 August 2020

Source: 31 August 2020 Fact sheets and Morningstar

There really are so many aspects that need to be properly considered to ensure you and your family’s needs are being planned for and monitored continuously that blindly placing your trust in the system is no longer an option. The world has gone through a reset because of Covid and now is a good time to review your investment strategy, goals and objectives – as adjustments may need to be made.

The world has changed – have you made any changes?

Anthony Palmer (CA) SA is Group Commercial Director and Head of Carrick Wealth’s Investment Strategy.

Carrick Wealth is an authorized financial services provider, FSP number 45621, and winner of the August 2020 Intellidex awards for the best wealth manager in the category of Wealthy Executive.

*Source: Registrar of Pension Funds Annual Report 2017