Unfortunately, conversations around which asset classes are preferable for risk-averse investors to achieve above-inflation returns have been coming up a lot recently. These risk-averse investors (especially those who are close to retirement or already retired) usually do not want to invest in equities because of their perceived volatility (and despite equities having outperformed inflation over the long term). With the South African Reserve Bank (SARB) having cut interest rates by 2.75% in 2020 alone and with the possibility that the SARB might cut rates even further, bank savings accounts do not currently offer attractive returns with the average return barely keeping pace with inflation which is now around 4.5%. This means that your purchasing power will likely be eroded by inflation over time.
The fact that interest rates are currently at the lowest levels in SA history also means that cash investors will be getting far less income. For example, if you had R10mn invested in a 32-day call account and you were earning about R56,000 per month in interest income, this year’s interest rate cuts mean that your monthly income has now dropped to about R33,500. Regrettably, there is no winding back the clock and Anchor’s house view is that interest rates are likely to linger at around these levels for a while.
To generate investment returns that will beat inflation over time, most investment experts will likely advise investors to diversify and include other asset classes such as bonds or equities in their portfolios and strike the right balance depending on your personal circumstances. However, we have noticed a marked shift by investors towards slightly more aggressive fixed-income strategies, in an attempt to protect their income levels. The incremental risk from moving towards a stable income fund and even a flexible income fund is quite small, however, the outlook for your investments can improve markedly.
In Figure 1 below, we set out our estimate of the likely 12-month returns for several fixed income strategies. The first two strategies will tend to be quite stable in value, while the second two strategies might see the value of your capital move around a little. Fixed income strategies are considered to be safer and have historically been significantly less volatile than equities.
Figure 1: Estimated 12-month returns for various fixed income strategies
Source: Anchor
| Portfolio | Anchor Equivalent | Yield Estimate (net of asset management fees) | Market Commentary |
|---|---|---|---|
| Money Market | Segregated Portfolio Only | 4.80% | Should generate very stable interest over time. |
| Stable Income | Segregated Portfolio Only – Minimum size of R250mn | 5.75% | Should generate a largely stable outcome over time. |
| Flexible Income Fund | Anchor BCI Flexible Fund | 6.50% | 99% of the time you would expect a stable income over time. We can see some small shocks to the portfolio at times of stress. A movement of 1% in the market value over a period of a month would be considered very large. |
| Bond Fund | Anchor BCI Bond Fund | 9.40% | This portfolio generates dependable interest income, but can be volatile. A movement of 5% in the market value over a period of a month would be considered very large. |
Each person’s individual circumstances are different and therefore investors should speak to their financial advisor. However, recent investment trends seem to indicate that the Flexible Income Fund strategy is giving most people the best risk/return outcomes in the current low-yielding environment.
