New retirement rules favour investors
Watch out for these five things as the retirement investment landscape changes
The retirement investment landscape is changing — and the new regulations favour the investor.
Following the recent announcement regarding the new savings default regulations, fund managers will be required to disclose all fees and charges on their products from March 1 2019.
While this has been the case for unit trusts for some time, there have been no standard disclosure requirements for retirement annuities, pension or preservation funds.
1. New transparency
As of March 1, fund managers will have to disclose all fees and charges on their retirement annuity, pension and preservation products, including fees considered “other costs”, such as bank charges, audit costs, taxes (such as stamp duty), and custodian charges.
This means that management and performance fees plus the “other costs” will be combined to give the total expense ratio (TER). Transaction costs (such as brokerage fees) will be added to the TER to give the total investment charge (TIC).
For the first time, you will be able to see the true underlying costs of your investments and make more informed choices as a result. Look out for the additional disclosure in your March monthly investment report or the 2019 first-quarter investment report.
2. It’s going to be a bear of a year
With global growth slowing, economic debt at an all-time high and political uncertainty rising, returns are going to be few and far between in the next decade. Investment fees are a key determinant of the investment outcome, and one of the few components of performance you can control directly.
A 2013 National Treasury report stated that “a regular saver, who reduces the charges on [their] retirement account from 2.5% of assets each year to 0.5% of assets annually, would receive a benefit 60% greater at retirement after 40 years, all else being equal.”
3. Reduce fees
You can reduce fees by constructing your investment portfolio cost-efficiently.
Review all costs, including advice and platform fees, and with the additional disclosure of TERs and TICs, you can see exactly how expensive your underlying fund manager is, and any performance fees and excessive transactional costs you are paying. Reduce these costs by moving to lower-fee products.
This is not an active versus passive debate, but rather about reducing overall costs. An effective way to lower the overall fee is to include passive investments as a component of your portfolio.
4. Active under pressure
The pressure on active management is on the rise.
One of the world’s greatest active managers, Warren Buffett, publicly backed passive investing as a viable means to grow wealth. Locally, according to the S&P, over the past five years, only one in 10 active managers beat the benchmark.
Academic research is also placing active managers under additional scrutiny as the active return is being divided into style factors, such as value, size, momentum and quality. By stripping out these styles from active management, the residual levels of active return are very small, and the question remains: why pay active fees when most of the active position is a style bet?
5. Passive gains ground
A decade ago, passive funds made up just 20% of US equity assets under management — a market share that has since more than doubled to almost 45%, according to Morningstar data. In SA, retail passive investing has grown by more than 600% over the past three years, according to the Association for Savings and Investment SA and Old Mutual Investment Group.
Low costs are one driver, but technology is also assisting the rise of passive investing, as faster and more powerful systems allow for large-scale customisation of exchange-traded funds (ETFs).
New indices, such as the Capped Swix, are also allowing concentration risk to be reduced on passive investment strategies. With a handful of stocks making up nearly half the SA equity market, this is an important consideration.
To sum up, as of March 1 2019, look closely at your investment statements and work out exactly how much you are paying in fees. If they are too high, consider moving a portion of your portfolio to passive management and picking only the best active managers in their class for the active portion.
• Hulett is head: asset allocation at Sygnia Group.