Photo: File.

JOHANNESBURG – Given the volatile nature of local markets in recent years, smooth bonus funds have increased in popularity among South Africans seeking a more stable ride to retirement. 

This most likely shows that South Africans, especially those who are most vulnerable, are opting for all the protection from market volatility that they can get.

However, considering the steep fees and costly guarantees that are typically associated with these funds, is this smooth ride all it’s expected to be?

This is a question posed by Pavit Ramnarain, Actuary at Momentum, who says that the high capital charges come down to the expensive nature of providing investors with a guarantee on the money they invest (referred to as the “capital” amount) and on part of or all future bonuses.

 “These guarantees – while integral to capital protection when the market is not performing – can be so expensive that they actually end up eating into returns, because the capital charges are normally deducted from your growth.”

However, Ramnarain explains that investors need a high capital guarantee now more than ever. “A 100% capital guarantee is essentially a shield from loss, no matter what happens in the market. 

This means that if an investor were to exit a smooth bonus fund at benefit payment stage when markets are at a low, they would be guaranteed to get 100% of the money that they had invested together with any guaranteed bonuses that were declared.

“Without this guarantee, the unfortunate and untimely occurrence of a benefit payment (death, disability, resignation, retirement, or retrenchment) during a market slump could have a serious impact on the financial future of both the member and their dependents,” he says.

As such, Momentum Corporate has re-engineered the smooth bonus fund category to create a low-cost, high-guaranteed version – the MomentumSmooth-Edge Fund. 

Ramnarain explains that the fund’s design has resulted in the lowest capital charge for a 100% capital guarantee and that costs have been further reduced by utilising a combination of passive, smart-beta and active investment strategies. 

Smart-beta emulates the lower costs of passive investing, while still capturing some benefits of active management.

“By reducing the capital charge and applying a combination of investment strategies, we have managed to significantly reduce the total cost of the fund, which means more money can be channelled towards members’ accumulated retirement benefits, which is exactly what the most vulnerable employees need.”

Ramnarain assures that this low-cost solution does not come at the cost of any benefits of smoothing. “The Momentum Smooth-Edge Fund utilises the same proven smoothing capabilities as Momentum Corporate’s existing smooth bonus solutions. This means that when markets are volatile, investors are able to take the middle road by means of smooth bonuses.

“The process of smoothing essentially holds back some of the returns in a reserve when markets are doing well and releases these reserves when markets are performing poorly – minimizing the impact of market volatility for as long as the policyholder is invested,” he explains.

Although a new innovation at a low cost in the market, Ramnarain also ensures Momentum’s Smooth-Edge Fund is underpinned by a proven investment track record. “Although past returns are not an indication of future performance, the underlying investment portfolio for the fund is a Momentum Investments portfolio that has been delivering solid investment performance since its inception in 2011, with an annualised return in excess of 11%.

“The Momentum Smooth-Edge Fund offers the best of both worlds, 100% capital protection on benefit payments together with excellent expected inflation-beating returns in the long-term, at an unmatched fee. It really is a game changer.”

PERSONAL FINANCE