Issue: March/May 2008
Edutorials
Old Mutual Corporate

Has your company's retirement fund kept up with the times?


Roy Singh,
Head of Investments,
Old Mutual Corporate

While some market-linked investment products have increasingly gained favour amongst retirement funds over the past few years, recent innovations offer an optimal combination of capital guarantee, real returns and stability, which is relevant particularly during this period of exceptional market volatility.

Leading the charge into a new era is Old Mutual’s new Absolute Growth Portfolios. Launched last year, demand for these portfolios has perhaps grown faster than many other investment vehicles. After only ten months, they already have almost R12 billion in assets and within the earlier part of this year R20 billion is expected. Although most of the flows have been transfers from existing smoothed-bonus portfolios, new client money is also being secured.

“Smoothing does not impair returns”

The market is responding positively to the attractive features of the Old Mutual Absolute Growth Portfolios:

  • A more aggressive investment philosophy, enhancing prospects for superior returns;
  • A core/satellite approach to managing domestic equities, combining cost efficiency with greater prospects for out-performance;
  • Explicit inflation-linked targets for returns;
  • A transparent bonus-smoothing mechanism, enabling simple calculation of expected bonuses by investors;
  • A choice of three capital-guarantee levels: 50 percent, 80 percent and 100 percent;
  • An option of a flat fee structure or performance linked fees;
  • Full disclosure of underlying returns, bonus declaration process, bonus-smoothing reserves, fees and charges.

The Absolute Growth Portfolios enhance certain features of pure market linked funds, in that they provide stable, targeted returns in excess of inflation with retirement funds’ security of capital backed by Old Mutual. Also, the Absolute Growth Portfolios portfolios provide total transparency and full disclosures.

Roy Singh, head of Investments at Old Mutual Corporate, argues that smoothing returns is still preferable to other methods of managing volatility – such as investing in cash – to achieve capital security. “Unlike other strategies that invest in ‘lower risk’ asset classes,” he points out, “smoothing does not impair returns.

”Singh notes that the Absolute Growth Portfolios also addresses historic concerns of smooth bonus portfolios being too-conservative, and lacking clarity on how bonuses are determined as well as inadequate disclosure of reserve levels, underlying asset returns and costs or charges.

Three Absolute Growth Portfolios options are available:

  • Absolute Smooth Growth provides a lower level of guarantee (50 percent of capital), while effectively smoothing returns with consequently low charges for the inherent guarantee. It targets a return of CPI plus six percent per annum;
  • Absolute Stable Growth guarantees 80 percent of capital and targets a return of CPI plus 5,5 percent per annum;
  • Absolute Secure Growth provides full security with 100 percent of capital and bonuses guaranteed while targeting a return of CPI plus 3,5 percent per annum.

These targets are based on medium term returns over any rolling three-year period.

All three portfolios have the same underlying asset structure, managed by various boutiques of Old Mutual Investment Group South Africa (OMIGSA) on recommendations of the OMIGSA macro-strategy investments team. The philosophy is based on specialist boutiques managing different asset classes. For example, Singh adds, domestic equities are managed by five distinct boutiques whose combined expertise are expected to deliver more cost-efficient investment returns.

“Returns generated on the underlying asset structure are passed on to retirement funds by a transparent bonus philosophy, explicitly linked to CPI investment targets”

In support of this philosophy, there is quarterly disclosure of the bonus-smoothing reserve and underlying asset performance.

2008 has heralded in a period with much uncertainty and volatility in both local and global financial markets. After the strong bull market that produced exceptional capital appreciation over the past four and half years, has your company’s retirement fund kept up with the times?

For more information, please contact Roy Singh on (021) 509 0484 or e-mail CorporateInvestments@oldmutual.com