Members of retirement funds which have invested their assets in balanced investment portfolios are receiving inflation-beating growth, the latest research from Absa Consultants and Actuaries shows.
See table.
The Absa Monitor for Retirement Fund Investments evaluates the performance of the portfolios in which many retirement funds invest their assets. Depending on their risk profile, the portfolios are classified as conservative, balanced or aggressive.
The survey is based on the performance of 96 portfolios controlling retirement fund assets to the value of about R175 billion.
Most retirement funds invest their assets in balanced portfolios, which in turn invest across a range of asset classes, including equities, bonds, cash and, in some cases, property.
Conservative portfolios generally produce lower returns, because they invest a larger proportion of their funds in less risky assets, such as bonds and cash. Aggressive portfolios have higher risk, because a greater proportion of their assets are invested in equities. However, aggressive portfolios usually produce higher returns over the long term.
According to the Absa Monitor for Retirement Fund Investments, the median portfolio in the balanced category (that is, the portfolio in the middle of the table) gave retirement fund investors a real (after-inflation) return of 31.9 percent over one year to the end of March 2004. These returns were produced on the back of strong performance by the share market.
Over the year ending March 31, 2004, South African equities delivered returns of more than 45 percent. Bonds delivered more than 12 percent and cash just under 11 percent.
The median portfolio in the balanced category produced returns of eight percent over three years and returns of 8.7 percent over five years.
Furthermore, 85 percent of all the portfolios - aggressive, balanced and conservative - out-performed their benchmarks for the three years ending March 2004. On average, the portfolios achieved this out-performance with lower volatility than their benchmarks, Francois Viljoen, the manager of asset consulting at Absa Consultants and Actuaries, says.
You should not only evaluate each portfolio's performance relative to its peers. Firstly, past performance is no guarantee of future performance.
Secondly, it is necessary to consider how a portfolio performed on the basis of other factors, such as whether it beat inflation or not, its volatility (that is, how much its return deviated from its average return over a three-year period,) the risk that the portfolio manager took to achieve the returns, and how the portfolio fared against its benchmark.
As is turns out, all the portfolios - conservative, balanced and aggressive - achieved inflation-beating returns over the past one, three, five and 10 years for the period ending March 2004.
In the balanced category, the average volatility measure was 12.2 percent. The four portfolios that produced the top performance relative to their peers had a volatility that was either on par with, or below, the average volatility measure.
The top portfolio on a relative performance basis, the Allan Gray Full Discretion, delivered a return of 22.7 percent and its volatility measure was 11.3 percent.
The second-best portfolio on a relative performance basis, the Allan Gray Life Global Balanced, had a return of 21.9 percent and a volatility of 10.9 percent.
The volatility measure of the Oasis Segregated Full Discretion portfolio, which produced a relative return of 21.8 percent, was 12.2 percent.
The Foord Segregated Full Discretion portfolio, whose relative return was 20.7 percent, had a volatility measure of 12 percent.
In terms of volatility, the top three portfolios were: M-Cubed Diversified 50, with a volatility measure of 9.4 percent (and a relative return of 12.3 percent); Investment Solutions Medium Equity, a volatility measure of 9.5 percent (a 13.1 percent relative return); and Sanlam Matrix 60, with a volatility measure of 10.7 percent volatility (a 14.1 percent relative return).
Although Stanlib Preferred Assets produced a fairly average relative return of 13.9 percent, it took on the highest risk - a volatility measure of 14.7 percent - of all the portfolios in the balanced category.
The returns delivered by the portfolios do not necessarily reflect the returns you, the retirement fund member, received from your retirement fund. Your fund may be invested in a specially tailored portfolio, which has its own risk characteristics and benchmarks against which you should evaluate its performance.
The performance of all the portfolios in the survey represents the "best investment view" of the various asset management companies. The best investment view reflects the asset allocation and stock selection the asset management company makes when a retirement fund gives it total discretion to invest the fund's assets locally and offshore.