Retirement Income update May 2023

The volatile start to 2023 is once again a good example of why it is critical to focus on downside protection to reduce sequence risk for post-retirement investors. While markets were buoyant in January on the back of the reopening of the Chinese economy, expectations of a lower terminal US fed funds rate, and higher growth estimates from the International Monetary Fund (IMF) for 2023, risk assets lost their sparkle in February and March as the effects of the Silicon Valley Bank collapse rippled through markets. These two consecutive negative months across risk assets all but wiped out the gains made during January. The graph below illustrates how the volatility of the South African equity market (FTSE/JSE Shareholder Weighted Index) has increased above the 15-year average – which includes both the global financial crisis and the COVID-19 crisis – since the end of 2022.

Source: Sanlam Investments Multi-Manager, INET, March 2023

When market sentiment swings in this manner, it becomes important that investments of an uncorrelated, or lowly-correlated nature are included in an investment portfolio. This contributes towards risk and return opportunities being harvested from a wide variety of sources to provide diversification and robust performance in the portfolio.

Hedge funds have been a particularly valuable uncorrelated inclusion within the Graviton Retirement Income Solutions over the last year to March 2023, to complement our traditional long-only holdings. The graph below compares the risk-return profiles (in rand terms) of all the incumbent hedge funds with that of traditional asset classes, as well as the ASISA Multi-Asset Low, Medium, and High category averages for the one year to 31 March 2023. The funds with the most favourable risk-return profiles are in the upper left-hand corner of the graph.

Our current hedge funds held across portfolios have outperformed the ASISA Multi-Asset Low, Medium, and High category averages over the last year, and most of them did so at lower levels of volatility. The only asset classes that managed to outperform the incumbent hedge funds were global equity and global bonds, and global equity did so at a significantly higher level of volatility than hedge funds. Allocations to the Amplify SCI Diversified Income, Enhanced Equity, Absolute Income and Real Income Retail Hedge Funds played a significant role in assisting the Graviton Retirement Income Solutions in protecting capital over the last year. While these funds share the name of the Amplify brand, they are all independently managed by different managers as evidenced in their varied outcomes relative to each other.

Source: Sanlam Investments Multi-Manager, Morningstar, March 2023

Our focus has, however, not only been on capital protection, but also on ensuring that we capture enough upside when return opportunities are presented. As such, we have increased our allocation to the Amplify SCI Enhanced Equity Retail Hedge Fund in the Retirement Income 5% and 6% Solutions. This is a long-short equity hedge fund that can utilise both shorting and leverage to capture returns in excess of equity market returns. We continue to investigate opportunities to increase the ability of these solutions to capture upside without sacrificing on capital protection and sequence risk.

Another change across portfolios over the quarter was the reduction in global equities due to weak earnings expectations and a weak rand. The proceeds of this switch were invested in local flexible income and flexible equity, based on more attractive relative valuations.

When looking at the actual experience of a client drawing an income, the ability of the Graviton Retirement Income Solutions to protect clients against sequence risk becomes especially apparent. This is reflected in the graph below, which compares the current capital that an investor would have – taking the drawdowns at the specified levels of each solution into account – as at the end of March 2023 if they had invested R1 million in the Graviton Solutions a year ago, versus investments in the respective ASISA category averages.

Source: Sanlam Investments Multi-Manager, Morningstar, March 2023

Over the last year, clients would have benefitted by having been invested in the Graviton Retirement Income 3%, 4%, 5% and 6% Solutions when compared to their respective peer groups.

While we expect increased volatility to continue for the foreseeable future, we continue to aim to shield your clients’ investments from sequence risk and longevity risk. We continue to focus on building diversified solutions by investing in multiple sources of risk and return that offer downside capital protection as well as upside capture, to provide your clients with a more consistent, smooth-return experience.