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Smart investing to beat longevity risk

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Sanlam’s actuarial tables show that on average, someone born in 1967 could live to age 95. Increased longevity means we could be “retired” for as long as we’ve worked. Say you start working at age 25 and retire at 60, that’s 35 working years. If you live to age 95, that’s another 35 years … a 1:1 ratio! Sounds amazing in theory, but is it feasible in practice, financially? That’s where a long-term strategy of investing in growth assets is key. 

Growth assets are key to avoid a shortfall in retirement

With increased longevity comes the urgent need to invest in growth assets. Fred White, head of Balanced Funds at Sanlam Investment Management (SIM), co-manages the SIM Balanced Fund along with Ralph Thomas. White believes that investors are choosing balanced funds as a long-term return oriented solution. 

“We believe investors do not choose balanced funds for volatility management; such solutions are more likely to be found among the absolute return funds. They come to a balanced fund because they want growth,” White says. “That’s why we will, on average, have a bias to growth assets.”

White points out that over the 20 years since the turn of the century, despite Y2K, the burst of the DotCom bubble, the Global Financial Crisis and pressure on growth assets in recent years, local equities have still significantly outperformed bonds. R1 invested in SA Bonds at the start of 2000 would have grown to R7.30 at the end of 2019, but to R12.40 if it was invested in the All Share index.

But growth assets require a long-term commitment

Growth assets do come with the complication of larger drawdowns, though. The most important thing that investors need to remember is that drawdowns recover again and over the very long term the outperformance of growth assets over bonds has been consistent. White warns that investors need to prepare themselves for interim periods when growth assets do underperform, but the timing of such events is nearly impossible to predict. Therefore, if you have a bias towards growth assets you need a supplementary protective strategy that reduces drawdown risk. 

White and Thomas spend the bulk of their time either looking for ways to enhance returns or finding protective strategies that supplement their growth bias.

The quest for enhanced returns

An example of how the managers enhance the returns of the Sanlam Investment Management Balanced Fund is the fund’s exposure to a unique basket of international real assets — a carve-out from one of the Sanlam UK-based absolute return funds. White says: “These real assets tend to have long-term rental contracts in place with built-in inflation-linked escalations. The real assets include property, infrastructure and renewable energy, but also interesting assets such as music rights and aircraft leasing.” 

Fund managers and investors in the long game together

White and Thomas understand the longevity challenge that investors face and they manage the SIM Balanced Fund so as to maximise long-term growth without taking on undue risks. “Even our share options have been folded into units in the fund we manage, and they only start vesting on the day we retire,” White says. “We are fully invested alongside our clients for many years to come.”

For additional information and disclosure please refer to the MDD (Factsheet) on the fund webpage: https://www.sanlaminvestments.com/corefunds/Pages/simbalanced.aspx

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