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Coronation p kempen - november 2012
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Transcript of Coronation p kempen - november 2012
Sustainable Income in Retirement
Peter Kempen9 November 2012
State of the retirement income market
278,000 living annuities Average size: R560,000 Average income rate: 7%
90%
…of the R27bn invested in compulsory annuities in 2011
were invested in living annuities
>50%
…of living annuitants under 70 draw an income above
7.5%Source: ASISA Living Annuity Statistics for calendar year 2011.
Potentially far-reaching policy interventions to make the post-retirement income market more sustainable
Technical discussion paper B:“Enabling a better income in retirement”
Key proposals
Increased automation in the retirement process
Increased longevity protection for most retirees
Reforming living annuities
Increased automation
Increased automation in the retirement process
Retirement funds must select a single default retirement income product
Retirees will be auto-enrolled into the default option
May opt out of default option, subject to taking advice
When opting out, they must choose a conventional life annuity or another product that meets certain criteria
Increased longevity protection
Increased longevity protection for most retirees
First R1.5m of capital available to purchase a retirement income to be invested in an income plan that provides some form of longevity protection
Simplicity the word – very little choice, transparency, only initial commission and only on initiation and first two switches
Suggested designs include conventional annuities, variable annuities and a default version of a RIT
When opting out, they must choose a conventional life annuity or another product that meets certain criteria
Increased longevity protection for most retirees
Source: National Treasury
Reforming living annuities
Introduction of retirement income trust (RIT)
Modelled on CIS – transparent and well understood
Same tax treatment as living annuities
No investment choice to reduce fees, but may choose different underlying investment strategies
Age-dependent drawdown limits
Limited commission to intermediaries
Will be able to transfer from a RIT to a conventional annuity free of charge
Reform existing living annuities to make them consistent with RIT
Reforming living annuities
Retirement income planning trade-offs
Inflation risk• Balance spending needs between 1st and 2nd halves of retirement
• Have enough exposure to growth assets
• Capital Plus has 60% risk budget specifically to assist with long horizon income drawdown programmes
Sequence-of-returns risk• Manage downside risks (Goldilocks approach to risk exposure required)
• Select more conservative drawdown rates when assets are expensive / outlook poor
• Adjust income drawdown in line with actual returns (spending rule approach)
Longevity risk• Most clients underestimate their life expectancy
• If you can afford advice, you are likely to live longer than average
• Hence the need for a 30-40 year planning horizon when retiring at 60-65
• You can only insure against this risk by buying a life annuity at the moment (but poorly priced because of low rates environment)
Retirees’ risks
Income sustainability: 7.5% initial drawdown rate
If you earn a net real return of…
… you can maintain purchasing power for
2% 9 years
3% 11 years
4% 12 years
5% 15 years
6% 20 years
7% 23 years
Source: Asisa Standard on Living Annuities. Assumes constant inflation-adjusted withdrawals.
Income sustainability: 5% initial drawdown rate
If you earn a net real return of…
… you can maintain purchasing power for
2% 19 years
3% 24 years
4% 34 years
5% 40+ years
6% 40+ years
7% 40+ years
Source: Asisa Standard on Living Annuities. Assumes constant inflation-adjusted withdrawals.
SAFEMAX• Highest sustainable withdrawal rate if you retired in the year when a 50:50 equity: bond
portfolio offered the worst 30 year future return
• In SA this was 1930, when your sustainable withdrawal rate was 3.86% (assuming zero fees!)
It’s all about the first ten years• 80% of variation in safe drawdown rates is explained by interplay between investment
return, drawdowns and inflation over the first decade of retirement
Individual circumstances matter• Significant opportunity for advice to add value…
More lessons from the literature / history
Shorter than average life expectancy
Using spending rules• Formally matching drawdown rate to return and inflation experience during the first ten
years of retirement adds another 1%…
• Downside: potentially more income variability than some clients can stomach
Assuming declining spending as client ages• US study shows 65-74 cohort spends 20% less & 75-84 cohort 40% less than 55-64 year
olds. If entirely voluntary (debatable), this justifies a 1%-2% increase in initial drawdown rate
• Only works if adequate provision made for late-life medical expenses
The difference three years make• If you delay retirement by 3 years, you can increase the sustainable drawdown rate by
around 20% without making further contributions
Meeting higher spending needs
Coronation Balanced Defensive Cautious investors requiring stable returns
Risk (Annualised Standard Deviation)
Exposure to Growth Assets
Avg 35%Max 40%Reg 28
Long-term Growth
Investment Objective
CoroBalanced
Defensive
CoroTop 20
3 Years →
Income & Growth(Multi-asset)
Immediate Income
Ret
urn
(An
nu
alis
ed
Re
turn
)
CoroStrategic Income
CoroCapital Plus
CoroBalanced
Plus
Conservative Moderate Aggressive
2/10 3/10 4/10 6/10 8/10
Risk Profile
• Aim to exceed cash + 3% over time
• Protected capital over 12 months 100% of the time
10.9%
4.1%9.9%
12.3%
17.2%
2.1%
9.3%
6.7%
9.3%
10.5%
5 Year Performance & Risk quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested. Growth Assets are defined as domestic/foreign equities, listed property & commodities ex gold.
19
Avg 15%Max 25%
(0% normal shares)Reg 28
Avg 50%Max 60%Reg 28
Avg 70%Max 85%Reg 28
100%
Ave
rag
e ex
po
sure
to
gro
wth
ass
ets
thro
ug
h t
he
cycl
e (5
yea
rs)
Th
e ex
po
sure
will
flu
ctu
ate
as v
alu
atio
ns
chan
ge
• Aim to outperform CPI + 4% over medium term
• Protect Capital over 12 months
Balanced Defensive Fund
Coronation Balanced Defensive FundPerformance since launch
R176 373
R151 525
R153 289
Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested
R 100.000
R 105.000
R 110.000
R 115.000
R 120.000
R 125.000
R 130.000
R 135.000
R 140.000
R 145.000
R 150.000
R 155.000
R 160.000
R 165.000
R 170.000
R 175.000
R 180.000
R 185.000
Feb-0
7M
ar-
07
Apr-
07
May-0
7Ju
n-0
7Ju
l-07
Aug-0
7S
ep-0
7O
ct-0
7N
ov-0
7D
ec-
07
Jan-0
8Feb-0
8M
ar-
08
Apr-
08
May-0
8Ju
n-0
8Ju
l-08
Aug-0
8S
ep-0
8O
ct-0
8N
ov-0
8D
ec-
08
Jan-0
9Feb-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-
09
Jan-1
0Feb-1
0M
ar-
10
Apr-
10
May-1
0Ju
n-1
0Ju
l-10
Aug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-
10
Jan-1
1Feb-1
1M
ar-
11
Apr-
11
May-1
1Ju
n-1
1Ju
l-11
Aug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-
11
Jan-1
2Feb-1
2M
ar-
12
Apr-
12
May-1
2Ju
n-1
2Ju
l-12
Aug-1
2S
ep-1
2
Value of a R100,000 investment on 1 February 2007
Coro Balanced Defensive
Mean Prudential Low Equity
STEFI
Coronation Balanced Defensive Fund Positive returns over all 12-month periods
Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay-
08
Jun
-08
Jul-
08
Au
g-0
8S
ep
-08
Oct-
08
No
v-0
8D
ec-0
8Ja
n-0
9Fe
b-0
9M
ar-
09
Ap
r-0
9M
ay-
09
Jun
-09
Jul-
09
Au
g-0
9S
ep
-09
Oct-
09
No
v-0
9D
ec-0
9Ja
n-1
0Fe
b-1
0M
ar-
10
Ap
r-1
0M
ay-
10
Jun
-10
Jul-
10
Au
g-1
0S
ep
-10
Oct-
10
No
v-1
0D
ec-1
0Ja
n-1
1Fe
b-1
1M
ar-
11
Ap
r-1
1M
ay-
11
Jun
-11
Jul-
11
Au
g-1
1S
ep
-11
Oct-
11
No
v-1
1D
ec-1
1Ja
n-1
2Fe
b-1
2M
ar-
12
Ap
r-1
2M
ay-
12
Jun
-12
Jul-
12
Au
g-1
2S
ep
-12
Rolling 12 Month Returns & Standard Deviation
Coro Balanced Defensive Mean Prud Low Eq Coro Ann Std Dev Mean Ann Std Dev
Coronation Balanced Defensive Fund Consistent 1st quartile performance
1 Year 3 Year 5 Year Since launch
Ranking 10/66 3/53 1/40 2/35
Quartile 1st 1st 1st 1st
Returns 15.9% 12.4% 10.9% 10.7%
Category Average 13.0% 9.8% 7.6% 8.0%
Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested
Coronation Balanced Defensive Asset Allocation since launch
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
June
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
Jun
12
Jul 1
2
Aug
12
Sep
12
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Int Fixed Income/Cash
SA Pref Shares/Other
SA IL Bonds
SA Corp Bonds
SA Gov Bonds
SA Cash
Real Estate
Int Equities
SA Equity
40% max exposure to growth assets
Growth Assets are defined as domestic/foreign equities (excl. Pref shares), listed property & commodities. Asset Allocation as at 30 September 2012
Coronation Balanced Defensive Portfolio positioning
Reg. 28 Compliant
Growth Assets are defined as domestic/foreign equities (excl. Pref shares), listed property & commodities. Asset Allocation as at 30 September 2012
Income Assets 67.6%
Growth Assets 32.4%
International Real Estate
Domestic Real Estate
Int Equity
SA Equity
0.9%
4.3%
18.7%
8.5%
SA Pref Shares & Other
Int. Cash / Bonds
SA IL Bonds
SA Cash
SA Corp Bonds
1.6%
5.0%
12.1%
14.4%
34.5%
Capital Plus Fund
Coronation Capital PlusPerformance since launch
Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested.
R455 736
R380 840
R240 660
R 50.000
R 100.000
R 150.000
R 200.000
R 250.000
R 300.000
R 350.000
R 400.000
R 450.000
R 500.000
Jun-0
1A
ug-0
1O
ct-0
1D
ec-
01
Feb-0
2A
pr-
02
Jun-0
2A
ug-0
2O
ct-0
2D
ec-
02
Feb-0
3A
pr-
03
Jun-0
3A
ug-0
3O
ct-0
3D
ec-
03
Feb-0
4A
pr-
04
Jun-0
4A
ug-0
4O
ct-0
4D
ec-
04
Feb-0
5A
pr-
05
Jun-0
5A
ug-0
5O
ct-0
5D
ec-
05
Feb-0
6A
pr-
06
Jun-0
6A
ug-0
6O
ct-0
6D
ec-
06
Feb-0
7A
pr-
07
Jun-0
7A
ug-0
7O
ct-0
7D
ec-
07
Feb-0
8A
pr-
08
Jun-0
8A
ug-0
8O
ct-0
8D
ec-
08
Feb-0
9A
pr-
09
Jun-0
9A
ug-0
9O
ct-0
9D
ec-
09
Feb-1
0A
pr-
10
Jun-1
0A
ug-1
0O
ct-1
0D
ec-
10
Feb-1
1A
pr-
11
Jun-1
1A
ug-1
1O
ct-1
1D
ec-
11
Feb-1
2A
pr-
12
Jun-1
2A
ug-1
2
Value of R100,000 invested on 02 J uly 2001
Coronation Capital Plus
Mean of Domestic AA Pru Variable Equity
CPIX +4%
Coronation Capital PlusRolling 1 Year Returns
Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested.
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Jun
-02
Au
g-0
2O
ct-
02
De
c-0
2Fe
b-0
3A
pr-
03
Jun
-03
Au
g-0
3O
ct-
03
De
c-0
3Fe
b-0
4A
pr-
04
Jun
-04
Au
g-0
4O
ct-
04
De
c-0
4Fe
b-0
5A
pr-
05
Jun
-05
Au
g-0
5O
ct-
05
De
c-0
5Fe
b-0
6A
pr-
06
Jun
-06
Au
g-0
6O
ct-
06
De
c-0
6Fe
b-0
7A
pr-
07
Jun
-07
Au
g-0
7O
ct-
07
De
c-0
7Fe
b-0
8A
pr-
08
Jun
-08
Au
g-0
8O
ct-
08
De
c-0
8Fe
b-0
9A
pr-
09
Jun
-09
Au
g-0
9O
ct-
09
De
c-0
9Fe
b-1
0A
pr-
10
Jun
-10
Au
g-1
0O
ct-
10
De
c-1
0Fe
b-1
1A
pr-
11
Jun
-11
Au
g-1
1O
ct-
11
De
c-1
1Fe
b-1
2A
pr-
12
Jun
-12
Au
g-1
2
Rolling 12 month return since 02 J uly 2001
Coronation Capital Plus
Mean of Domestic AA Pru Variable Equity
CPIX +4%
Coronation Capital Plus FundConsistent 1st quartile performance
1 Year 3 Year 5 Year 10 Year Inception
Ranking 7/44 4/40 6/32 1/7 1/5
Quartile 1st 1st 1st 1st 1st
Returns 15.2% 11.6% 9.3% 14.3% 14.4%
Category Average 11.6% 8.6% 7.2% 10.3% 10.9%
Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested
Coronation Capital Plus FundBear Market Returns
Performance quoted from Morningstar as at 31 August 2012 for a lump sum investment with income distributions reinvested.
Jul 01 - Sept 01 Jun 02 to Apr 03 Mar 04 to Apr 04 Mar 05 to Apr 05 Nov 07 to Jan 08 Jun 08 to Mar 09 Apr 10 to Jun 10 May 11 to Sep 11-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
Cap Plus Bal Med Eqt mean ALSI Pru Var Equity Pru Low Equity
Coronation Capital Plus FundBull Market Returns
Performance quoted from Morningstar as at 31 August 2012 for a lump sum investment with income distributions reinvested.
Oct 01 to May 02 May 03 to Feb 04
May 04 to Feb 05
May 05 to Oct 07 Feb 08 to May 08
Apr 09 to Mar 10 July 10 to Apr 11 Oct 11 to Feb 12 Mar 12 to Aug 120.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Cap Plus Bal Med Eqt mean ALSI Pru Var Equity Pru Low Equity
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun1
0
Sep
10
Dec
10
Mar
11
June
11
Sep
11
Dec
11
Mar
12
Jun
12
Jul 1
2
Aug
12
Sep
12
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Int Cash/FI
SA Pref Shares & Other
SA IL Bonds
SA Corp Bonds
SA Gov Bonds
SA Cash
Real Estate
Int Equities
SA Equity
Coronation Capital PlusAsset Allocation History
Max exposure to growth assets reduced to 60%
Growth Assets are defined as domestic/foreign equities, listed property & commodities (excl Gold).Asset Allocation at as 30 September 2012.
Coronation Capital Plus Portfolio Positioning
Growth Assets are defined as domestic/foreign equities, listed property & commodities. As at 30 September 2012. *Including effect of foreign currency hedge against foreign assets.
International Real Estate
Domestic Real Estate
Int Equity
SA Equity
2.4%
3.7%
15.5%
32.5%
Int. Cash/FI*
SA Pref Shares/Other
SA Cash
SA Corp Bonds
SA IL Bonds
7.3%
5.9%
6.4%
15.6%
10.7%
Income Assets 45.9%
Growth Assets 54.1%
Philosophy guiding protection strategy
Deployed to protect, not to make money (i.e. like buying insurance without the benefit of a no-claims bonus....)
No automatic rollover or renewal (each transaction is evaluated separately before implementation)
Level at which you buy protection far more important than price of volatility(hence we prefer an active approach)
Aim to spread levels of protection as far as possible (in terms of strikes, terms and expiry dates)
Will not off-lay costs by assuming unlimited liabilities on the downside!! (See our experience during GFC....)
Protection strategies
Our experience around protection over the last 12 months
Buying at-the-money puts work best if the market trends strongly up or down
Given lacklustre market performance over past year (with no big sell-offs) insurance didn't really add to portfolio performance
But it did allow us to continue buying some of cyclical shares into weakness, knowing that we are protected in the event of a disaster hitting global growth
Cost of protection continued to decline as appetite for risk increased, hence some mark-to-market losses on volatility also experienced
Estimated cost was around 80-90 basis points on overall portfolio
Protection strategies
Actual experience in Capital Plus since inception
As at 30 April 2012 – includes 0.75% annual adviser/admin fee
Value of R1m invested 11 years ago given different real income rates
No income 3% 5% 7% 9%
Nominal Real Nominal Real Nominal Real Nominal Real Nominal Real
Money market fund 2,280,321 1,173,079 1,433,732 735,802 1,051,237 538,638 770,192 393,999 563,847 287,975
Coro Strategic Income 3,012,251 1,549,956 1,893,927 972,196 1,388,660 711,689 1,017,407 520,582 744,830 380,495
Coro Capital Plus 4,053,696 2,085,889 2,548,728 1,308,356 1,868,773 957,774 1,369,163 700,587 1,002,346 512,061
Change in income level between 2001 and April 2012 after adjustment for inflation
3% 5% 7% 9%
Initial income per R1m invested in 2001 30,000 50,000 70,000 90,000
Initial income as % of initial capital 3.0% 5.0% 7.0% 9.0%
Current income adjusted for inflation 58,212 97,021 135,829 174,637
Current income as % of nominal capital
Average money market fund 4.1% 9.2% 17.6% 31.0%
Coronation Strategic Income 3.1% 7.0% 13.4% 23.4%
Coronation Capital Plus 2.3% 5.2% 9.9% 17.4%
Actual experience in Capital Plus since inception
As at 30 April 2012 – includes 0.75% annual adviser/admin fee
Value of R1m invested 11 years ago given different real income rates
No income 3% 5% 7% 9%
Nominal Real Nominal Real Nominal Real Nominal Real Nominal Real
Money market fund 2,280,321 1,173,079 1,433,732 735,802 1,051,237 538,638 770,192 393,999 563,847 287,975
Coro Strategic Income 3,012,251 1,549,956 1,893,927 972,196 1,388,660 711,689 1,017,407 520,582 744,830 380,495
Coro Capital Plus 4,053,696 2,085,889 2,548,728 1,308,356 1,868,773 957,774 1,369,163 700,587 1,002,346 512,061
Change in income level between 2001 and April 2012 after adjustment for inflation
3% 5% 7% 9%
Initial income per R1m invested in 2001 30,000 50,000 70,000 90,000
Initial income as % of initial capital 3.0% 5.0% 7.0% 9.0%
Current income adjusted for inflation 58,212 97,021 135,829 174,637
Current income as % of nominal capital
Average money market fund 4.1% 9.2% 17.6% 31.0%
Coronation Strategic Income 3.1% 7.0% 13.4% 23.4%
Coronation Capital Plus 2.3% 5.2% 9.9% 17.4%
Questions?
Disclaimer
Coronation Asset Management is an Authorised Financial Service Provider.
The content of this presentation and any information provided may be of a general nature and may not be based on any analysis of the
investment objectives, financial situation or particular needs of the client. (as defined in the Financial Advisory Intermediary Services
Act) As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client
first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that
would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate
considering the client’s own objectives and particular needs.
Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith.
39
Thank you!