Investors globally and locally are finding themselves in an ‘investment yield drought’, which started in 2008 with the financial crisis in developed markets and rippled through to the rest of the world.
Then came Covid-19, which wreaked havoc on the markets. Retirees and those planning for retirement have justifiably panicked. But the constant refrain from the financial planning industry remains: Do not take short-term decisions for longterm plans.
In South Africa there is a unique combination between the Covid-19 market crash and the SA sovereign risk downgrade by rating agencies that caused long-term interest rates on bonds to increase, says Deane Moore, CEO of retirement income specialist Just.
“Higher long-term interest rates are good news for pensioners because life annuity rates improved significantly. This means those in or close to retirement have an opportunity to purchase guaranteed income for life at some of the cheapest levels in decades.”
Alexander Babich, managing director at Alexander Babich & Associates and deputy chair of the SA Independent Financial Advisors Association (SAIFAA) says SA has an incredible tendency to bounce back from the brink of disaster.
Internationally, interest rates are at either 0% or close to it. In SA investors can get a fixed rate on a three-year SA retail savings bond of 6% and a fixed rate of 8% on five years.
“We do not believe SA is going bankrupt just yet. Although there are credit risks, we think it is still a calculated risk. We believe fixed income funds with short-duration government bonds are still a safe space.”
Babich has also invested clients in global franchise businesses and offshore passive funds with a strategic allocation of between 30% and 40%.
“We have not been as aggressive about offshore investments as other market commentators have been.”
Active or passive funds?
The debate about actively managed funds against passive funds has become more pronounced with the increase in new passive unit trusts and exchange-traded funds (ETFs) in the past decade.
An ETF is an investment fund operating on the stock exchange holding assets, such as stocks, bonds, or commodities. An index fund is a mutual fund or an ETF constructed to follow a specific industry or index, whereas an actively managed fund has an investment team, led by a fund manager who decides which companies to invest in, based on various research models.
According to Zama Dikana, business development manager of retail and savings at Old Mutual, index funds have been outperforming actively managed funds for an extended period, both locally and internationally.
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22 October 2020