Retirement fund members whose savings are in market-linked portfolios are sitting pretty following good performance by these portfolios in the fourth quarter of last year.
According to the latest Absa Monitor, the average return of balanced portfolios with global mandates over three years to the end of December 2004 was 13.7 percent a year, which comfortably beat inflation of 5.3 percent over the same period.
In portfolios with a global mandate, the portfolio manager has the discretion to invest locally and offshore (subject to exchange control regulations), unlike funds whose mandates restrict their managers to investing only in South Africa. Currently, the exchange control regulations limit a retirement fund portfolio's offshore exposure to 15 percent of the portfolio's assets.
The survey further categorises portfolios as aggressive, balanced or conservative, depending mainly on their equity exposure.
A portfolio with a balanced mandate invests across the range of asset classes, including shares, bonds, property and cash-related investments. Portfolios with an aggressive mandate tend to have a higher weighting in equities compared to balanced or conservative portfolios.
Portfolios with a conservative mandate tend to hold a smaller proportion of equities in relation to other asset classes. You can generally expect a portfolio with a conservative mandate to produce lower returns over time, but at lower risk, than one with an aggressive mandate.
The Absa Monitor, which is compiled by Absa Consultants and Actuaries, reviews the performance of South African retirement fund portfolios. Its findings are based on the performance of 89 portfolios, controlling retirement fund assets to the value of about R200 billion.
Francois Viljoen, the manager of asset consulting at Absa Consultants and Actuaries, says on the whole, retirement fund portfolios in the survey delivered stellar performance during 2004 on the back of good returns from the local equity and bond markets.
Allan Gray's Life Global Balanced Portfolio leapt from fourth position, in the third quarter of 2004, to the top spot in the category for funds with a global balanced mandate over the three-year period to the end of December 2004. The portfolio produced an annual return of 19.1 percent.
In second place over three years was the Allan Gray Full Discretion Portfolio, with a return of 18.9 percent a year. The Oasis Segregated Full Discretion portfolio, with 17.9 percent a year, slipped from first place in the third quarter of 2004 to third position in the fourth quarter of last year.
There was a total of 30 funds in the global balanced mandate category over three years. The average annual return in this category was 26.7 percent over one year, 13.7 percent over three years, 15 percent over five years, and 15.7 percent over 10 years.
Although the Metropolitan Managed SA (Global) portfolio once again produced the lowest annual return over three years - 10.1 percent - it still comfortably out-performed inflation, which was 5.3 percent a year over the period.
Allan Gray maintained its top-ranking status over the five- and 10-year measurement periods. The Allan Gray Full Discretion portfolio produced a return of 24.1 percent a year over five years and 22.2 percent a year over 10 years.
The Stanlib portfolios slipped substantially in their rankings over the fourth quarter. Over the three years ending December 2004, the Stanlib Preferred Assets portfolio dropped from 13th position, at the end of the third quarter of 2004, to 26th position at the end of the final quarter of the year. The Stanlib Segregated Full International Discretion portfolio fell from 19th, in the third quarter of last year, to 28th position at the end of the fourth quarter of last year.
The Coronation Absolute Fund delivered the best performance in the category for portfolios with a conservative global mandate.
The fund came out tops over one, three and five years, delivering annual returns of 27.8 percent, 16.9 percent and 17.9 percent over the respective periods.
The Investec Absolute Opportunity Fund was the top performer over one, three and five years in the category for global funds with an aggressive mandate.
Over one year, the Investec Absolute Opportunity Fund returned 33.3 percent, compared to the average annual return for aggressive funds of 28.2 percent. Over three years, the fund's annual return was 20.4 percent (compared to the annual average return of 13.8 percent); and over five years, the fund produced 17.4 percent a year (compared to 13.8 percent).
You should not judge the performance of a retirement portfolio purely on the basis of how it has performed relative to its peers. There are other, arguably more important, measures against which to assess performance. These include the volatility of the portfolio, the performance of the portfolio relative to inflation and the fund's performance relative to its benchmark.
The table sets out how the balanced global portfolios in the Absa Monitor fared against the above criteria over the three years to the end of December 2004.
The portfolio that produced the best inflation-beating performance was the Allan Gray Life Global Balanced Portfolio. The Foord Segregated Full Discretion portfolio delivered the best performance relative to its own benchmark. The Investment Solutions Medium Equity portfolio produced the least volatile returns over the three-year period.
The volatility of a portfolio is the amount by which its monthly returns deviate from its average return over a three-year period. A less volatile fund is better than one that shows greater volatility, because investors saving for retirement want consistently good returns that beat inflation.
The portfolios analysed in the Absa Monitor represent the "house" portfolios of the various investment companies. The assets of many individual employer-sponsored retirement funds are in these "house" portfolios.
However, the assets of your employer-sponsored retirement fund may be in a customised portfolio, which is managed according to an investment mandate drawn up by the fund's trustees and their investment advisers. Therefore, the performance of the portfolios in the Absa Monitor is not necessarily an indication how of your retirement fund has performed.
Nevertheless, the Absa Monitor gives you a good indication of how market-linked retirement portfolios available from South African investment houses have performed.