A shock absorber for investors during volatile times: smoothed bonus funds

Old Mutual’s Smoothed Bonus Portfolios level off the extreme ups and downs of a volatile market with built-in smoothing and further guarantees to protect investors from massive market shocks.

That’s the promise. Do they deliver?

For investors seeking reassurance, the current economy is a perfect test track.

‘If ever we needed a test case to prove what a smoothed bonus portfolio can do, it’s been the pandemic period of 2020 to 2022,’ says Marvin Nair, Old Mutual’s Head of Smoothed Bonus Products.

Consider the bumps investors have experienced: lockdown, negative West Texas Intermediate (WTI) crude oil prices, growth, recession…

The smoothing philosophy, Nair explains, offers greater certainty in such uncertain times.

‘Markets are in disarray,’ he says, ‘but at the same time, smoothing provides protection against volatility, as well as an ultimate limit on losses through underpinned guarantees.’

A comparison of guaranteed short- and long-term returns

The proof, however, will always be in the numbers.

From a returns point of view, Nair says a good comparison is between the return achieved by Old Mutual’s flagship Absolute Growth Portfolios (AGP) and the median return in the 2022 Alexander Forbes Manager Watch Survey.

‘This annual survey compares the performance of large institutional fund managers in South Africa.’

‘They found that the median fund return as at the end of June 2022 (YTD) was -3.4% – and that it was delivered with multiple ups and downs along the way.’

‘In contrast, AGP Smooth was able to deliver 5.9% over the same period without a single month of negative returns being passed on to investors.’

Another way to look at volatility is in terms of standard deviation, that is, the deviation of the return away from the average over a given period.

During the same period, Old Mutual Absolute Smooth Growth Portfolio’s standard deviation was 0.09%.

In stark contrast, the median fund return deviation in the Alexander Forbes survey was 2.11%.

‘Having said that, we do caution against a short-term focus,’ says Nair.

‘If you’re investing for the long-term, you need to focus on long-term outcomes.’

‘From that perspective AGP Smooth produced a 10-year return of 11% p.a. on an annualised basis, compared to the median of 10% p.a. indicated in the survey.’

‘From a numbers point of view, Old Mutual’s Smoothed Bonus Portfolios are certainly doing the job we expect them to.’

How smoothed funds make investors’ journey easier

‘Let’s say we’re driving from Johannesburg to Cape Town,’ Nair says.

‘You and I will both get to the same destination, but with your market-linked balanced fund you’ll traverse the ups and downs of the Karoo koppies, while I’ll have a much smoother investment journey with my smoothed bonus portfolios on the N1.’

‘The smoothing mechanism is like a shock absorber protecting me from the bumps in the road.’

When the bumps become too much for your proverbial ‘investment car’ to handle, AGP offers an additional layer of protection or insurance in the form of guarantees to limit the losses investors experience during this phase.

Additional protection against those bumps is important, because if you leave the fund at the wrong time – say, if the market hits a big pothole or the wheels well and truly come off – you’ll still have a portion of your investment guaranteed at that point in time.

Maybe you’re retiring, maybe you’re resigning, or maybe you’ve been retrenched. Either way, the timing is everything.

‘The question is: do you want to be like the person who retired at the end of March 2020, when the bottom fell out of the market?’ Nair asks.

‘If you’re invested in a market-linked balanced fund the answer is a resounding no.’

‘If you’re in a smoothed bonus fund, it matters less because you have layers of protection.’

For more information on this and other useful topics, click here.

Old Mutual Corporate also conducted a social experiment to demonstrate how prepared people are for retirement. To view, visit www.oldmutual.co.za/superfundpower

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