Investors who have already retired, need to balance their return expectations with portfolio volatility. Not having a high enough allocation to equities could result in longevity risk. Bearing in mind, equities are naturally volatile and one should expect drawdowns to occur.
Historically, to reduce a portfolio’s volatility, investors have constructed traditional, balanced portfolios by allocating 60% to equities and 40% to bonds. The allocation of alternative asset classes is normally neglected. We believe that the 36ONE Hedge Funds are the perfect addition for investors with living annuities, as a way of improving returns and lowering volatility. A benefit of a living annuity is that there is no limit to the amount you can allocate to hedge funds. The table below highlights returns and volatilities for different portfolio allocations, including our 36ONE SNN QI Hedge Fund. As you add higher allocations to the 36ONE SNN QI Hedge Fund, overall volatility and maximum drawdown is reduced, while performance improves.
Retirees cannot afford large or prolonged drawdowns. For example, if an investor is drawing down 9% of their starting portfolio p.a., a 50% drawdown means that the original 9% income that they are drawing, is now 18% of the portfolio value. This means that when markets do eventually recover, there will be significantly less capital from which an income can be drawn. This point is best highlighted by the two example scenarios below.
The first scenario compares the return of our 36ONE SNN QI Hedge Fund with JSE All Share Index. R1 million was initially invested and no withdrawals are made. Our 36ONE SNN QI Hedge Fund had an 88% higher portfolio end value, with a 55% risk reduction (volatility) and returned 16.2% p.a., compared to the market’s return of 11.5% p.a.
| End Portfolio Value | Since Inception Return p.a. | |
|---|---|---|
| 36ONE SNN QI Hedge Fund | R9 631 900 | 16.2% p.a. |
| FTSE/JSE All Share Index | R5 128 700 | 11.5% p.a. |
| Difference | R4 503 200 | 4.7% |
The second scenario assumes R1 million was initially invested, however, the investor withdraws R7 500 income per month, which escalates at 6% p.a. Here, the divergence in performance is even greater with a 133% higher portfolio end value in the 36ONE SNN QI Hedge Fund. This is because the JSE All Share Index had greater drawdowns and investors had to keep drawing a monthly income despite those drawdowns. Therefore there was less capital available for growth when the market recovered. This permanently impaired the long-term return potential of the portfolio. This example illustrates how volatility should be an important consideration when constructing portfolios, especially when the investor is drawing a monthly income.
| End Portfolio Value | Since Inception Return p.a. | |
|---|---|---|
| 36ONE SNN QI Hedge Fund | R6 675 500 | 13.3% p.a. |
| FTSE/JSE All Share Index | R2 853 100 | 7.2% p.a. |
| Difference | R3 822 400 | 6.1% |
There is one final benefit to having a portfolio with lower volatility: peace of mind! When the market has significant drawdowns, investors have to worry less about the correct course of action. Human nature is pro-cyclical - i.e. selling at the bottom of the market or buying at the top of a long bull run. This is value destructive and results in poor investing outcomes. Our 36ONE Hedge Funds have significantly lower drawdowns and this helps investors stay invested through market cycles.
Disclaimer:
Bloomberg, Sanne. Past Performance is not necessarily an indication of future performance. 36ONE SNN QIHF CISCA inception date is 01 November 2016. Sanne Management Company is registered and approved by the FSCA under CISCA and retains full legal responsibility for the third-party-named portfolio. 36ONE QIHF Highest and lowest rolling 12-month performance since inception: High 58.63%; Low -10.84%. Full mandatory disclosures can be obtained on our website by following this link: https://www.36one.co.za/legal/disclaimer. 36ONE Asset Management Pty Ltd is a licensed financial service provider. FSP# 19107