Last year started with such promise and ended up being one of the most disappointing years for investments for the entire world, not just South Africa. The world saw some of the worst investment returns seen since the global financial crash in 2008.
In Summary
- The world investment markets did about -10,4% in Dollar terms (MSCI World)
- Emerging markets (countries like SA, Brazil, India, Mexico, Turkey, Chile etc) returned -16,6% in Dollar terms
- The SA local stock exchange returned -11,7%
- Rand depreciated against the Dollar by -15,6%. It started the year at R12.44 and ended on R14.38
This shows that no matter where you invested your money last year, you would have done poorly, as a result of a slowdown in world economic growth. A slowdown affects emerging markets, like South Africa, the hardest.
How does this affect the money you are saving in your company retirement fund?
Before answering this question, it is important to understand the purpose of a retirement fund.
A retirement fund is a product that allows you to save money for the day you go on retirement. If you save a lot of money, you will have a good comfortable retirement. If you don’t manage to save enough money, your retirement may be tough, as you can’t afford to buy the things you need to live comfortably.
The main goal of a retirement fund is:
- to provide an easy way to save money via a salary deduction,
- then invest the money so that it can grow in the long term,
- and then, at retirement, use the money saved plus growth to give you an income to live on after you have stopped working.
Your employer deducts money from your salary every month and this money is given to experts to grow the money. These experts are called Asset Managers and work for companies like Allan Gray, Coronation, Investec, Prudential, Old Mutual, Sanlam, Momentum etc. This money then gets invested into what are known as asset classes (different types of investments).
There are four main asset classes that Asset Managers invest in:
- Cash
- Bonds/ fixed interest
- Property
- Shares (equities)
The table below shows you how these asset classes behave over time which dictates how and when each asset class should be used.
The Asset Managers invest in a mix of these four asset classes to spread the investment risk and optimise the portfolio construction. Imagine if the Asset Managers only invested in property this past year! The portfolio returns could have been so much worse.
The Lifestage Model
If you have six or more years before your normal retirement age (65), you should will be invested 100% into a fund portfolio that is fosuced on growth, which comes with higher risk.
In most pension funds as you move closer to retirement, your money in the fund will automatically move from a “riskier” porfolio into a “safer” portfolio – this process is known as a lifestage model as it invests your money according to the stage you are at as you approach retirement.
It is important to know how your retirement funds are invested and if you have chosen to invest outside of the lifestage model and have chosen one/more of the available portfolios, you will have your money invested in those portfolio/s until you make another election. Remember to take professional financial advice before making any investment switches.
To get long term growth, the most growth focused funds have approximately 80-85% of the portfolio invested in local / global shares and properties (in other words, growth assets). This means that when global and local shares perform well this portfolio will have good positive growth. The opposite is also true: when shares perform poorly, then these portfolios will deliver poor returns. We saw this in 2018!
We have already mentioned above that globally the world experienced negative growth in shares -10,4% (in US Dollars), we also noted that locally the share market delivered -11,7% and the property market gave us -25.3%. With 80-85% invested in these asset classes, it is not surprising that some retirment fund portfolios delivered a low or even negative return for the year 2018.
What does this mean to you and me?
It means that in the short term we have all lost money. Some people may have lost more than others but we have all lost. It is not only your fund that has suffered these losses; almost all retirement funds (invested in growth portfolios) in South Africa have had the same experience in 2018.
When we experience these short term losses, we always need to remember that the main aim of a retirement fund is to offer long term growth (this is more than five years). One year is not long term.
Given the relative performance of the global and local markets at more than -10%, many retirement funds did not lose as much as the market. Yes, it is negative growth in the short term, but if we look over a longer five year period your portfolio is lkely to have delivered a return of 5% or more per annum. In some cases this is actually a compounded return of 30% or more over the five years including these recent losses.
This demonstrates the importance of not only focusing on the short term but also remembering the long term nature of retirement savings and the tendency for returns to be higher in growth portfolios over the longer term.
In the short term, those that are close to retirement and are invested in less risk assets will at least have seen some positive returns. A good return in what was a very difficult economic period. Your fundwill have achieved its objectives of providing stable, smoothed returns with a partial guarantee on benefit payments.
If you are:
- concerned about your retirement savings and
- want to ensure that the investment strategy used in your retirement fund remains valid
- want to ensure that you can expect this long term investment strategy to deliver good inflation beating returns over time;
please contact one of our advisors and retirement benefit counsellors at Optimate Financial Solutions, on queries@ofs.co.za. They will then contact and assist you.