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November 2020 – The living annuity conundrum

The living annuity conundrum?

The COVID 19 pandemic has highlighted several retirement problems! Historically, on retirement, most retirees have invested their retirement savings into living annuities.

For living annuities to sustain an income over the duration of the investor’s lifetime two things are important:

  • If the income withdrawal is more than the return on the investment the capital value will decrease. This will ultimately mean that the client’s income will decrease in the future.
  • The living annuity is dependent on the returns produce within the underlying investments. These returns could be positive or negative   

International research indicates that an investor should withdraw a monthly income of 4-5% per annum if they wish their income to be sustainable for the duration of their lives.  It is a sad fact that in South Africa most people have not saved enough for retirement and they are withdrawing 7-10% per annum.

Investors who have invested their retirement savings into living annuities are facing an income crisis as the income provided by living annuities has decreased dramatically. Looking back over the past two or three years, income funds were achieving returns +/-8% per annum. However, earlier this year the South African treasury reduced the Repo rate by 3%. As a result, the average return for income funds has declined to +/- 5% per annum.

The problem gains intensity for those investors who placed their annuities into balanced funds [multi asset high equity funds] Over the past year the average balanced fund in this sector has achieved -2.79% and over five years the average Balance fund return has been 2.47% per annum. [Performance figures supplied by Morningstar as at 31st October 2020.] What is more chilling is that in the last five major world stock market crashes balanced funds have declined by +/- 20%. This could be calamitous for living annuities.

Herein lies the problem! Investors who withdraw between 7-10% or more will see their capital values diminish and the investments are doomed to fail!

Let us be quite clear about this! One cannot spend more than what one is earning! If one withdraws 8% and the return is 2%, the capital will reduce by 6%.

Investors need to decrease their income urgently if they wish their annuities to succeed. We cannot emphasize this enough! Please contact us to review your living annuity income withdrawals and to explore alternative options.

Christmas Office Closure

Our offices will close on Tuesday 15th December 2020 and re-open on Monday 11th January 2021. We, at Kevin Mills Financial Services, Greg, Leonie and Kevin wish all our clients, family and friends a blessed Christmas and Happy New Year!

Stay safe and well and COVID free!

 

“Once in the world, a stable had something in it that was bigger than our whole world.” C.S. Lewis.

October 2020 – Market update

In search of returns…

Over the past few years, it has become increasingly more difficult to find funds that are providing meaningful returns in South Africa.

We have highlighted some of the returns received on investments in South Africa for the past year. The figures represent the average of all the funds in their sectors.

[Figures supplied by Morningstar from 1st October 2019 to 30th September 2020.]

  • South African Equity Funds: -2.87%
  • South African Balanced Fund [high equity sector]: 1.85%
  • South African Stable Funds [low equity sector]: 2.83%
  • South African Income Funds: 5.25%

In contrast, the returns in offshore funds have been much better:

  • Global Equity funds: 21%
  • Global Balanced Funds [High equity sector]: 14.91%
  • Global Income Funds: 2.06%

We do not anticipate much growth in the South African markets and believe that long term investors should be considering increasing their offshore investments!

We asked a few fund managers to give us their thoughts on offshore investing:

Coronation Fund Managers

“For long-term investors, we consistently highlight the benefits of having appropriate levels of international exposure through the investment cycle. While it may be tempting to increase or decrease your international exposure for temporary reasons (such as current sentiment, specific currency expectations or recent returns), having exposure to foreign asset classes is not about the timing. Instead, it is an allocation that should be made with strategic reasons in mind, such as:

  • optimising your portfolio – by allocating money internationally, you reduce the level of risk associated with achieving a specific rate of expected return
  • accessing opportunities outside of our local investment universe – investors who restrict their universe to domestic assets not only miss out on opportunities in industries that are hardly present in the local market (e.g. information technology, biotechnology, electronics, pharmaceuticals) but also on a much wider opportunity set within those industries while gaining access to a more diverse opportunity set
  • your future shopping basket plays a key role – many items in a consumer’s shopping basket (from fuel to food to healthcare) are largely priced in foreign currencies as the inputs are either commodities (with prices struck in global markets), or heavily reliant on imported content. Having adequate international exposure acts as a hedge against the long-term change in prices
  • matching future liabilities in hard currency – this may include expenses such as overseas travel (for leisure purposes or visiting family members living abroad) or business opportunities, investing for a next generation’s education, or emigration.”

 

Duggan Matthews, Chief Investment officer, Marriott Income Specialists

While the global economic recovery is likely to be slow, the first world is set to recover faster than emerging economies, as they have more resources at their disposal to deal with the current crisis.

We’ve found that high-quality, multinational companies listed on first world exchanges – those offering timeless products and brands – have been able to increase their dividends, even during the COVID-19 crisis. In addition, companies of this nature are currently offering very good value as the differential between their current dividend yields and the 10-year US Government Bond yield is the widest it has been in over 30 years. In an environment characterised by historically low interest rates, companies that are able to grow their earnings, and reliably return money to shareholders in the form of dividends, are a highly attractive proposition.

Ninety One

“An offshore investment gives you access to opportunities across different countries, industries, companies and currencies, exposing your portfolio to more possibilities while diversifying your risk. So, while you enjoy life in the country you love, your investment could be discovering a world of investment opportunity.

Benefits of Offshore Investing:

  1. More investment opportunities:
  2. Local investors are limited to a smaller opportunity set as SA makes up less than 1% of world GDP.
  3. When you diversify internationally, you get access to a much wider range of investment opportunities to grow our money across countries, companies and currencies.
  • Diversifying Risk
  • There is a high correlation between emerging markets, so by going offshore it allows clients to properly invest into developed markets.  
  • Local investors not only carry the SA specific political risks, but also the risk of being an emerging market.
  • An emerging market is at the peril of what foreigners think of emerging markets, and what are other emerging markets are currently doing.
  • Maintain your global purchasing power
  • Spreading your investments across markets and currencies, minimizes the impact of currency depreciation or political and market events on your wealth
  • Investing offshore may make it easier to fund any international liabilities and help you meet your international goals.”

Perhaps it is time to re-look at your investment portfolio and consider diversifying offshore. For more information on the offshore investment opportunities please contact us.

Stay safe and well!

August 2020 – Fund update

Marriott First World Hybrid Real Estate Fund is re-opening

First World Hybrid Real Estate Plc is a real estate investment company that invests in a combination of direct real estate and listed real estate investment trusts.

The objective of this Fund is to combine the benefits of direct and listed First World real estate to generate a reliable, predictable and growing income. With the majority of the return generated from the income yield, the investment outcome can be anticipated with a reasonable degree of certainty.

In the five months since trading was temporarily placed on hold, the Fund has performed well given the unprecedented uncertainty due to the COVID-19 impact on the property market. During this period the direct property portfolio saw:

  • Growth in rental income
  • No rental write-offs
  • An increase in the overall portfolio valuation
  • The Fund has continued to pay quarterly dividends

Despite the market uncertainty and volatility, the Fund has performed well over the last 12 months providing investors with a return of 6.4% in Sterling. The outlook for the First World Hybrid Real Estate Fund remains good due to its emphasis on distribution warehousing. This sector has benefitted from strong occupational and investment demand.  

Return expectation

The Fund’s 4.5% income yield is attractive in an investment environment where income returns are increasingly hard to come by, and especially when compared to a 10 year UK bond yield which is now yielding 0.2%. Investors in the First World Hybrid Real Estate Fund can remain confident that the Fund will continue to serve them well over the longer term and given the First World Hybrid Real Estate’s emphasis on:

  • High-quality distribution warehouses
  • Robust tenants
  • Long term leases

The portfolio will continue to provide investors with between 4.5% – 6.5% in Sterling. For investors looking to diversify their investment portfolios, the First World Hybrid Real Estate Fund provides attractive returns in a first world currency and very little to no correlation to the world stock markets.

For more information or to invest in the First World Hybrid Real Estate Fund please contact Kevin or Greg.