Edition: Mar - May 2014


An innovative savings product that solves a multitude of problems is explained by Liberty Corporate divisional director De Wet van der Spuy.

Van der Spuy . . . best of both worlds

South African investors face difficult choices over the right kind of retirement savings product to meet their needs. As they move into new life stages, they’re often told that the vehicle they access must change from aggressive, to moderate and ultimately to conservative funds.

An innovative product from Liberty Corporate, named the Liberty Stable Growth Fund, has eliminated the need to port savings into different products. This is because the Fund mitigates the risk by using modern investment and risk-management techniques, to seek attractive long-term growth, while minimising short-term investment uncertainty.

This means it is also an appropriate choice for trustees who seek a solution that is suitable for their entire membership, whether old or young, or looking for growth or market protection. Therefore, these same members are well positioned to benefit from the risk and return.

This is the reason that, for many policyholders, the Liberty Stable Growth Fund has become the core of their retirement savings plan -- either as the growth phase of the Liberty Life Stage, or as an investment portfolio choice in its own right.

The Fund’s unique design, which makes it ideal for helping policyholders to achieve their retirement goals with as little risk as possible, has generated tremendous appeal to a large number of policyholders, receiving investments of over R5 billion in just one year from across the industry.

Essentially, the Fund is segmented into two parts – a return-generating component and a return-smoothing overlay. The return-generating component invests in a mix of local and offshore equities, bonds and cash. A layer of risk management is then added, with an objective to prevent significant capital losses in the event of a market crash.

For example, if a policyholder has R100 and loses R20, he/she has lost 20%, and now has R80. The policyholder will then require 25% growth (a percentage higher than the 20% loss), just to recover that loss. Over the long term, this can have a significant impact on the level of retirement savings. However, by avoiding these large losses, investors therefore have less ground to make up.

Once the returns have been generated, these are smoothed to ensure a stable return profile to policyholders. Returns are declared monthly, based on a transparent formula in line with the Fund’s target return. The formula ensures that excess returns in good times are held back (in a return-smoothing reserve) to supplement returns in negative markets. Likewise, should the markets be negative, the smoothing reserve will then be tapped to improve the returns declared to policyholders.

The Liberty Stable Growth Fund is explicitly not managed relative to traditional market-linked balanced funds. Instead, it is managed within a unique and controlled risk-return framework, aiming to provide a combination of short-term capital preservation and long-term growth.

The Fund is passively managed to reduce costs by investing in local and international passive indices including the ALSI Top 40, the ALBI and the MSCI World. By ascertaining the best performer in a particular cycle, such a passive approach negates the need to choose the right asset manager.

The chart on the previous page shows the expected long-term profile of the Fund’s returns. These returns can be expected to be markedly less volatile, avoiding large capital losses, while being in line with balanced funds over time.

The focus on short-term capital preservation means that, while the Fund may underperform compared to balanced funds during short-term bull markets, particularly at times of high market volatility, it is expected to outperform balanced funds in bear markets. This is the very aim of the capital preservation strategy.

The above graph shows the calendar-year performance of the fund since 2002, compared to the average balanced and absolute return funds. This period represents a complete economic cycle, with both bull and bear markets. All returns are gross of fees.

In a strongly upward market cycle, the Fund is able to capture upward market returns, but usually with a delay of a few months, as a result of the smoothing functionality that is built into the portfolio. As a result, the Fund is likely to fall behind market-linked portfolios in general as some returns are held back in reserve, but this reserve should be passed through to policyholders over time as the rally continues.

In a strongly downward cycle, the Fund will sustain some of the downward market movement, but it will quickly stop moving downward once losses become larger than normal market volatility. At this stage, the Fund is protected from further capital loss. The Fund is then able to outperform market-linked portfolios in strongly downward markets due to its smoothing and protection against major market losses.

The increasing levels of governance required of trustees mean that there is an onerous burden on them to understand and apply investment capabilities appropriately. However, by choosing one flexible product that meets various needs, trustees no longer need to identify different components and conduct due diligence on a variety of investment products.

Through a combination of cost-effective index tracking investments, long-term growth-focused strategic asset allocation, and effective risk-management techniques, the Liberty Stable Growth Fund is a unique, innovative new way to meet the challenges that both trustees and investors face head-on, ensuring maximum investment returns with minimum risk.