Edition: March - May 2015
EXPERT OPINION

Beat-inflation while reducing risk

– By Hank Viljoen, STANLIB Head of Fixed Income

Inflation can erode the purchasing power of money and adversely affect investment returns over time, if it is not managed.

 

Pensioners simply cannot afford to take on this risk, according to research conducted by ASISA which shows there is a large portion of retired investors who require a conservative portfolio that provides returns in excess of inflation.

Trustees have a fiduciary responsibility to assist with the preservation of capital that belongs to their members. This can be achieved by reducing the market risk the investment portfolio is exposed to. Their final objective is a stable and secure income stream at retirement.

Inflation-linked bonds can help to assist in managing this erosion of capital because they increase in value during inflationary periods.

Although in South Africa inflation has not been a major macroeconomic factor as it is currently within the SARB's target range, it may be a factor in the future owing to our volatile economy. Inflation-linked bonds are therefore a worthwhile consideration in a well-diversified portfolio.

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STANLIB has recently created an Inflation-Linked Bond Fund that would better enable investors to deal with the challenges of inflation in a focused manner to mitigate the risk of erosion over time. The Fund is ideal for retirement saving.

It's important that there is alignment between how assets are managed to achieve investors' retirement goals which ultimately enables them to maintain their lifestyle post retirement. Trustees need to manage investable assets on a consistent basis, as well as the transition between the pre- and post- retirement stage of their members. Inflation-linked bonds safeguard capital, which is a useful way to extend the life of a pensioner's income.

We believe there is a very real need for inflation linked bonds in the market, and have created this product to address the specific need of preserving capital. Our fund is designed to avoid exposing retirement capital to excess volatility, and we believe Trustees should seriously consider this option and not leave it too late.

The timing of an investment is important. While you want to expose investors to at least one business cycle at pre-retirement stage in order to allow for capital growth, by the time the member reaches age 55 then their capital needs to be protected against any potential 'systemic shocks' in the market. At that stage in their life, they should be forfeiting the wild ride of equities for a more secure and less volatile security.

Once investors have been exposed to inflation-beating returns during their 'aggressive' investment years, they should look to a stable and predictable source of inflation-beating returns, guaranteed by the South African Government. For that, look to Inflation-linked bonds.

Reducing return volatility through smoothing.

We smooth the returns using transparent formulae in order to reduce the volatility of returns. This ensures that the returns in the portfolio do not swing as wildly as the underlying market but instead increase steadily. Smoothing provides our investors with peace of mind as it ensures a certain level of predictability in returns -- which is very important for retirement planning.

This strategy also means that the fund may experience a lag in performance as any large upswings in the market will be declared over a few months. Smoothing also allows Stable Growth to declare positive returns to its investors even when the markets are down.

As many of the concerns which led to volatile markets last year continue into 2015, we feel Stable Growth is the right strategy to provide investors with smoothed returns and capital protection.

For more information, visit www.stanlib.com

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