If you thought 2008 was rough, the new year will be even grimmer. In SA, more than 300 000 people are set to lose their jobs. Workers are already receiving retrenchment letters. In the same postbag, they will get their pension fund statement which will show the value of their accumulated assets has fallen by 14% or more. Bonuses have been cut, and there's little room for real pay increases. But we show in the following articles that there are ways to stay afloat and come out on top when the tide turns.
LONG-TERM INVESTMENTS
Your pension funds are not safe anymore. You have lost money. What should you do?
When members of pension funds open their year-end benefit statements, they will be more than a little unhappy with what they see. Up to the end of November, they would have lost 13,6% on the balanced pension fund option, and as much as 23,7% if their money was invested in the worst performer, the Stanlib Stability Fund. Even if they had chosen the best performer, Allan Gray, they would have lost 4,1%.
Balanced funds typically hold 65% in equities, 25% in bonds and 10% in cash. The maximum equity holding in a pension fund is 75%, according to prudential investment guidelines. Pension funds are the only meaningful asset of most people, other than their house. But whereas the value of their house won't change every day, the value of their pension pot does, and daily online valuations can tell them that.
Members of funds did not have to worry about these in the days of defined benefit funds. They were then promised a pension based on their final salary: the employer took the investment risk. But with today's defined contribution funds, members feel the benefits of market growth and the pain of sliding markets. Like now.
According to Rowan Burger of Alexander Forbes, the equity allocation on balanced funds is increasing from 65% to 70%. "A high equity holding makes sense in the long term. But it might not be the right time to increase your risk in pension funds. You should not expect the 25%-plus returns the market has delivered in recent years."
But he advises against a cash-only fund, saying it is unsuitable for a long-term pension portfolio, which needs to beat inflation and provide capital growth. Historically, the average balanced fund has given a return of inflation plus 6,5%, though, of course, not every year. On average, it has lost money in one out of seven years - and 2008 will surely be in that unlucky string.
Increasingly, investors can treat their pension fund assets and their discretionary savings as one basket of money. Most funds have, or are introducing, individual member choice. In a few cases the choices include 30 or more unit trusts. But usually the choice is between a high-equity fund, balanced funds (though these funds often have identical asset allocation), a conservative fund, an absolute return fund and sometimes a cash fund. But 90% of investors opt for the default option, which is usually a balanced fund.
A good financial planner, as opposed to an insurance broker, will not focus on selling a product for commission and should tell you if it is better to pay off debt than buy another policy.
WHO TO TRUST WITH PLANNING
The first one to turn to when investors need help with their finances is a financial adviser. The trouble is that many people, such as convicted felon Schabir Shaik, call themselves financial advisers. Make sure whoever advises you has the certified financial planner qualification, which is acknowledged in major economies.
Good financial planners:
- Take the emotion out of personal finance by wading through the noise of turbulent financial markets;
- Devise a robust plan clients can stick to in good and bad times; and
- Have an integrated approach to financial management, investing, tax, retirement, risk cover and estate planning.
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John Anderson, a consultant at Alexander Forbes, says balanced or high-equity choices must be the options for long-term investors. But for those who are five years away from retirement, the way in which they want to exit their pension should determine their investment choice. "If you're going to take a traditional fixed annuity, you should be invested in a bond portfolio. Or, if you're going to invest in a living annuity (which is a basket of unit trusts), a portfolio with 30%- 40% equities is more appropriate."
So, what are your other choices? The absolute return fund should combine capital stability with higher growth than cash. But over the 11 months to November none of the funds even outperformed cash, and 55% lost money. Some absolute return funds, such as Prescient Positive Return, made intelligent use of futures and options to keep returns positive month by month. It is up 11,4% in the year to date. Others, such as Prudential Inflation Plus and Foord Absolute, seem like clones of their balanced funds, with losses of 8,3% and 14,6% respectively.
Conservative funds (with 30%-40% in shares) have been more reliable, with top performer Allan Gray Stable up 11,2% and the worst performer, Symmetry Conservative, losing a distressing but hardly catastrophic 5,3%.
Historically, when there is despair about the stock market, it is a good time to buy shares. Take March 2003 when sentiment was just as low. After that the JSE more than doubled. People who capitulated and went into cash missed a huge opportunity. It won't be as simple this time because of the depth of the international financial crisis, but there will still be opportunities to make money.
Fund trustees, in theory, can reduce the pain of losses in this downturn by selecting the right managers who provide performance over the index. But performances as recently as June have been a poor guide to the turbulent second half of the year.
For example, RE:CM, the boutique founded by ex-Investec manager Piet Viljoen, featured at the bottom, with a loss of 8% in the year to June. At its worst the RE:CM equity portfolio was 30% behind the all share index. It had a heavy weighting in out-of-favour life assurers and mid-caps such as Imperial and JD Group.
At the other extreme, Stanlib was riding high on the strength of its hefty bet on resource shares and construction. But by October these positions had been reversed. Stanlib experienced a 19,8% loss from September to November; RE:CM was the best manager by far over that time, losing "just" 1,6%.
The other big Johannesburg-based manager, RMB, was also a commodity bull. Chief investment officer Jonathan Stewart says he does not expect the slowdown in commodities to be quick and extensive. But he has reduced the pain for investors by tackling the crisis with a low equity allocation of 57%. "In the long run, however, we are commodity bulls. There has been underinvestment in mining production around the world, and growth in emerging markets remains exciting."
If you invested your money with Sanlam Investment Management, your savings pool could be low. Sanlam Investment Management appears to have got the worst of both worlds. It took the pain of not holding big positions in resources up to June but then did not join RE:CM in the recovery.
A new chief investment officer, Gerhard Cruywagen, had come into the business and "rebalanced" the portfolios towards resources at just the wrong time.
Viljoen prefers "boring" business models such as Metropolitan to resource shares. "Selling insurance policies to lower-income [earners] will never be as sexy as holding dominant positions in platinum and diamonds," he says. "But even if you had bought Anglo American in 2003 at the beginning of the super cycle, Metropolitan would have outperformed it by more than 100% over five years. We sold Anglo in 2006 when prices reached speculative levels."
Allan Gray did not hold any Anglo or Billiton shares this year. It was in the middle of the pack in June and by October it was at the top - a position it has held for most of the past 10 years.
Coronation chief investment officer Karl Leinberger held similar views. He believes retailers and food producers offer better value than commodity or construction shares. Coronation was third over the past quarter, after RE:CM and Allan Gray, and unless there is a miracle turnaround in the world economy, the defensive stance of these funds should pay off.
Ranking the Analysts 2009
