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A good strategy for living annuities – low volatility with moderately aggressive asset allocation

By Rocco Carr, Business Development Manager at Glacier by Sanlam, 5 September 2022

The Glacier Invest Real Income portfolios* are wrap funds1 aimed to reduce volatility while giving inflation-beating returns. The following options are available:

  1. Glacier Invest 2.5% Real Income Solution (Conservative)
  2. Glacier Invest 3% Real Income Solution (Cautious)
  3. Glacier Invest 4% Real Income Solution (Moderate)
  4. Glacier Invest 5% Real Income Solution (Moderately aggressive)
  5. Glacier Invest 6% Real Income Solution (Aggressive)

The Glacier Invest 5% and 6% Real Income Solutions offer really good value for money in a strategy that caters for longevity risk. Research shows that to keep a living annuity viable over 30 years, one needs to adopt a moderately aggressive asset allocation. However, such an asset allocation often leads to sharp volatility which many clients find challenging. During poor return periods, like we’ve seen in 2016 to 2020, and again in the period after the Russian invasion of Ukraine, the impact of sequence risk is enormous, and many clients have lost capital during these periods.

The Real Income Solutions focus on reducing volatility while keeping asset allocation in line with clients’ growth needs.

Why Use the Glacier Invest 5% Real Income Solution?

The graph below shows the five-year standard deviation2 of the low equity category being around 4.6% (red circle). This is typical of a cautious portfolio which aims to achieve a five-year return of inflation plus 3%.

risk-reward risk-reward

However, when we do the same exercise for the Glacier Invest 5% Real Income Solution, which is moderately aggressive, the five-year standard deviation is also at around 4.5% (red circle). Thus, by using the Glacier Invest 5% Real Income Solution, one takes on a similar risk as with a normal cautious portfolio, but the return possibility is far greater.

risk-reward-1 risk-reward-1

The Glacier Invest 5% Real Income Solution could therefore be suitable for clients who need inflation plus 5% return but can only tolerate low levels of volatility. We regard this as the most suitable option for many living annuity clients, as it offers the best of both worlds.

Performance

In the table below, the performance of a typical cautious portfolio is compared with the Glacier Invest 5% Real Income Solution over two years until end-June 2022. The Glacier Invest 5% Real income Solution constantly outperforms.

performance performance

How Volatility Is Controlled In the Glacier Invest 5% Real Income Solution

Volatility is managed using the following elements in the Solution:

  • The introduction of 12.5% exposure into five equally weighted hedge funds
  • 25% exposure to the Sanlam Multi-Managed Smooth Growth Fund, which has certain guarantees
  • Introduction of the Global Smooth Growth portfolio with guarantees
  • 15% exposure to a multi-strategy solution

Since the underlying assets are still moderately aggressive, the opportunity for growth is not taken away.

Why Use the Glacier Invest 6% Real Income Solution?

This portfolio has a higher volatility than the Glacier Invest 5% Real Income Solution, but although its underlying assets reflect an aggressive portfolio, the risk is less than the category average of the Worldwide Flexible category3. This portfolio has more offshore exposure, so it is suitable for clients who want to take on more risk over the long term.

The portfolio has outperformed the Worldwide category since its launch, with far fewer drawdowns during tough times (see the blue versus yellow lines in the graph below). The destruction of global markets during the first half of 2022 is evident, but also the resilience of the Real Income plus 6% during such volatile periods. The graph below is until 31 June 2022.

cumulative-performance cumulative-performance

These wrap funds present ideal opportunities for living annuity clients, and can be combined with one another, with other wrap funds, and other funds on the platform. However, the Glacier Invest Real Income Solutions could easily do the job for post-retirement income sustainability.

*The Glacier Invest Real Income Solutions include wrap fund portfolios managed by Glacier Financial Solutions (Pty) Ltd., a Licenced Discretionary Financial Services Provider, FSP 770, trading as Glacier Invest.

1A wrap fund is not actually a fund as such. It consists of a combination of collective investment schemes (also known as unit trusts) held in specified proportions to achieve a specific investment goal. This portfolio is managed (or ‘wrapped’) according to a specific mandate, and which aligns with your risk profile as an investor.

2Standard deviation is a basic mathematical concept that measures volatility in the market or the average amount by which individual data points differ from the mean. Simply put, standard deviation helps determine the spread of asset prices from their average price.

3The Worldwide Flexible is one of the categories of funds as defined by ASISA. ‘Worldwide’ means the portfolio is not limited by geography. These are collective investment portfolios that invest in both South African and foreign markets. There are no limits set for either domestic or foreign assets. ‘Flexible’ refers to the asset classes. A flexible fund is a mutual fund or other pooled investment that has broad flexibility for making investment decisions and allocations.

Graphs source: Morningstar

Glacier Invest is the discretionary fund management offering of Glacier Financial Solutions (Pty) Ltd (“Glacier’’). Glacier has partnered with Sanlam Multi-Manager International (Pty) Ltd, part of the Sanlam Investments Group, to optimise investment management responsibilities.

Glacier Financial Solutions (Pty) Ltd is a licensed discretionary financial services provider, trading as Glacier Invest FSP 770.

Sanlam Multi-Manager International (Pty) Ltd FSP 845 is a licensed discretionary financial services provider, acting as Juristic Representative under Glacier Financial Solutions (Pty) Ltd. As Juristic Representative of Glacier Invest, Sanlam Multi-Manager International (Pty) Ltd manages the retail investment solutions.

The Glacier Investment-Linked Living Annuity is underwritten by Sanlam Life Insurance Ltd and administered by Glacier Financial Solutions (Pty) Ltd.