Pavit Ramnarain, an actuary at Momentum. Picture: SUPPLIED/MOMENTUM
Pavit Ramnarain, an actuary at Momentum. Picture: SUPPLIED/MOMENTUM

Given the volatile nature of local markets in recent years, smoothed 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.

“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 – minimising the impact of market volatility for as long as the policyholder is invested,” says Pavit Ramnarain, an actuary at Momentum.

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?

Ramnarain says 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,” he says.

Ramnarain says 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 smoothed 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,” he says.

“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 effect on the financial future of both the member and their dependants.”

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

Ramnarain says the fund’s design has resulted in the lowest capital charge for a 100% capital guarantee, and that costs have been further reduced by combining 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,” he says.

He adds that this low-cost option does not come at the cost of any benefits of smoothing. “The Momentum Smooth-Edge Fund uses the same proven smoothing capabilities as Momentum Corporate’s existing smoothed bonus solutions. This means that when markets are volatile, investors can take the middle road by means of smoothed bonuses.

Although it is an innovative new product at a low cost in the market, Ramnarain says the Momentum 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 and excellent expected inflation-beating returns in the long term, at an unmatched fee. It really is a game changer.”

About Momentum

Momentum Corporate is the division of MMI Group within the JSE-listed financial services group MMI Holdings that engages large and medium-sized enterprises to help businesses and their employees on their journey to success. Momentum Corporate offers a holistic range of employee benefit solutions such as retirement, insurance, health and workplace risk management.

This article was paid for by Momentum.