Navigating the risk and return minefield
Retirement savings make up the bulk of the assets under management at South Africa's asset management companies.
The savings industry is split into two groups: retail and institutional. "Retail clients are like you and I," says Mike Ronald, head of the investment team at Marriott Asset Management. You hold savings in your own name at banks, insurance companies and asset managers.
Institutional clients (such as unit trust funds, pension funds or medical schemes) typically invest pooled funds on behalf of hundreds or thousands of investors. A popular financial instrument with both retail and institutional investors is the unit trust fund.
"By investing in a unit trust fund you have access to a wider set of investment instruments offering you varied, and potentially higher returns, depending on your risk appetite and investment time horizon," says Candice Paine, head of retail at Sanlam Investment Management.
Your money is managed by skilled and certified investment professionals while you have the flexibility of having your money always available to you within only two days' after giving notice.
Risk and return objectives
"The techniques used by asset managers in managing the savings of retail or institutional clients is the same," Ronald says. "They will strive to achieve the risk and return objectives stipulated for the funds whether stipulated by Joe Average or by the trustees of a pension fund".
Kwaku Koranteng, account manager at Investment Solutions agrees. "The underlying theories and practices for retail and institutional asset management are quite similar. The basic investment principles are universal, though investors may have different time horizons, objectives, legal structures and approaches to participating in the asset management environment".
Asset managers play an essential part in the retirement savings equation in that they deliver on the risk and return expectations of their clients. Johan Gouws, executive director at Absa Investments, simplifies the retirement saving process by considering two life stages: the working years leading up to retirement (typically spanning 30 to 40 years) and the years after retirement (about 25 to 30 years).
You should use the first stage to save and invest enough to create sufficient wealth for financial independence at retirement. During the second stage your objective shifts from wealth accumulation to wealth preservation.
You best guide through the retirement savings journey is a financial planner. The planner will assist you in determining an appropriate risk and return objective at each of the various life stages as well as advise on which savings products best meet this objective.
It is then up to the asset management firm to deliver the risk and return promised on the savings product in question.
"Asset managers assist both individuals and institutions to accumulate and preserve wealth," says Koranteng.
The simplest way to explain the interaction between risk and return is that the more risk involved in an investment, the higher the return. Cash is the least risky investment, followed by bonds, listed property and shares.
"Not taking sufficient investment risk in order to achieve the required real returns is a major retirement saving pitfall," says Gouws.
"Asset management will almost certainly have an impact on your life," says Ronald. "If you are saving towards retirement then your ability to retire is going to be affected by what the asset manager does."
The success of your retirement plan therefore hinges on both the adviser and asset manager. He says: "To choose the appropriate investment your financial adviser must know something about the objectives of the preferred funds as well as how these funds are managed - in other words - understand asset management."