A new product for retirees, the Essential Income Fund from specialist asset manager Marriott, allows you to “spend the income, not the capital”. Photo: File Image

This article was initially published in the 2nd-quarter 2019 edition of Personal Finance magazine.

Four years of disappointing equity market returns have left many investors feeling anxious about their financial futures. The common narrative used to ease concern is that investing is about the long-term and that better returns are around the corner. This is all good and well pre-retirement when investors are continuously making contributions. However, it is not so simple for retired investors who need income from their investments for 20 to 30 years.

Unlike pre-retirement, the requirement to continuously withdraw from a portfolio significantly increases the risk of running out of capital (longevity risk) when market returns are poor. The task of successfully navigating a low-return environment is complicated further with a choice of over a thousand unit trusts in South Africa. Remarkably, even with all this choice, retirees are still encouraged to draw only four percent from their savings to ensure a sustainable retirement income. This is far too low for the majority of retirees (the average drawdown in South Africa is about 6.6 percent) and this suggests an alternative approach is needed. 

Income-focused approach

Given the challenge facing retirees, Marriott has launched the Essential Income Fund. Designed and managed for South African investors looking to maximise their retirement lifestyles without the risk of running out of capital, the Marriott Essential Income Fund offers a simple, low-cost and effective means for retirees to navigate the current low-growth environment. 

With an exclusive focus on retired investors, we have applied our signature income-focused approach to managing the Essential Income Fund. The portfolio’s key differentiating factors are outlined below:

1. Reliable, growing income. When an investor requires an income from his or her investment, Marriott recommends drawing only the income produced by the investment, which we refer to as the matching principle. By drawing only the income produced, investors can be assured that their capital base will not be eroded (the biggest contributor to longevity risk). To achieve this the Marriott Essential Income Fund invests exclusively in companies that have been able to pay reliable and growing dividends consistently over the long-term, such as, Clicks, GrowthPoint, Sanlam and Standard Bank. The dividend track records of these companies are illustrated in the accompanying four graphs.

2. Optimal long-term asset allocation. The Essential Income Fund currently produces a gross yield of 6.9 percent, which should grow in line with inflation over time. This has been achieved through investing in an optimal mix of both growth and higher yielding assets classes as outlined in Table 1 below. The fund's asset allocation will remain relatively stable over time as we believe this is the right mix for investors looking for the highest sustainable level of inflation-hedged income. 

3. Low cost. The annual management fee of the portfolio is 0.75 percent, which is highly competitive.

Investor benefits

A combination of an income focused approach with an optimal long-term asset allocation and a low fee results in a number of key investor benefits which are outlined below:

1. Sustainable income – no longevity risk. By investing in assets that produce reliable and growing income streams, our income focused approach looks to match the income requirements (Rand liabilities) of retirees with the income produced by their capital (Rand assets). Investors can therefore live off the income produced by their investments without eroding capital which effectively eliminates the risk of running out of capital post retirement.

2. More income – higher drawdowns. The Essential Income Fund combines the benefits of both traditional living annuities and guaranteed annuities by enabling an investor to draw a higher level of sustainable income with increased flexibility (access/ability to leave a legacy). This is outlined in Table 2

3. Exposure to quality companies. The cornerstone of the Essential Income Fund is exposure to only the highest-quality South African dividend paying companies (property and equities) and government bonds. Applying our income-focused investment approach, we take no shortcuts (“reaching for yield”) in producing the fund’s income. The companies we select are responsible for generating the income for our investors into perpetuity, and therefore investing in quality businesses that are able to continually grow their earnings through all cycles is paramount. Over the long-term, companies of this nature tend to produce solid income and capital returns.

Summary 

Subdued returns and endless choice have left many retirees feeling anxious about their financial futures. Using the Essential Income Fund to “spend the income not the capital” will get your retirement plan back on track. For more information on the fund, visit Marriott’s website (www.marriott.co.za).

Duggan Matthews is chief investment officer at Marriott.

* The drawdown percentage for guaranteed annuities assumes joint life for a couple aged 60 with a 6 percent escalation as per 4th Quarter 2018 Personal Finance rates from the five top life insurance companies. Access refers to the flexibility an investor has to draw more income/capital from the investment in any given year. Legacy refers to the ability to leave capital for beneficiaries.

PERSONAL FINANCE