Blue Chip Journal - June 2019 edition
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RETIREMENT SOLUTIONS<br />
For a better retirement<br />
Spend the income, not the capital<br />
Duggan Matthews, Investment<br />
Professional and Chief Investment<br />
Officer at Marriott<br />
Four years of disappointing equity<br />
market returns have left many<br />
retired investors feeling anxious<br />
about their financial futures. Unlike<br />
pre-retirement, the requirement to continuously<br />
withdraw from a portfolio significantly<br />
increases the risk of running out of<br />
capital (longevity risk) when market returns<br />
are poor.<br />
To assist retirees in successfully navigating<br />
this low-return environment, Marriott<br />
has recently introduced a new fund – the<br />
Essential Income Fund – into its “Solutions<br />
for Retirement” fund range. Each portfolio<br />
is managed to deliver an expected level<br />
of income and growth in income to assist<br />
retirees in maintaining their lifestyles in<br />
retirement, as outlined in the table below:<br />
Spend the income not the capital for a better retirement<br />
Four years of disappointing equity market returns have left many retired investors feeling<br />
anxious about their financial futures.Unlike pre-retirement, the requirement to continuously<br />
withdraw from a portfolio significantly increases the risk of running out of capital (longevity risk)<br />
when markets returns are poor.<br />
To assist retirees in successfully navigating this low return environmentMarriott has recently<br />
introduced a new fund –the Essential Income Fund – into its “Solutions for Retirement” fund<br />
range. Each portfolio is managed to deliver an expected level of income and growth in income to<br />
assist retirees in maintaining their lifestyles in retirement, as outlined in the table below:<br />
With an exclusive focus on retired investors, we have applied our signature Income Focused<br />
approach to managing the Essential Income Fund. The portfolio’s key differentiating factors are<br />
outlined below:<br />
With an exclusive focus on retired investors,<br />
we have applied our signature Income<br />
Focused approach to managing the Essential<br />
Income Fund. The portfolio’s key differentiating<br />
factors are outlined below:<br />
1. Reliable, growing income<br />
When an investor requires an income from their investment, Marriott recommends drawing<br />
only the income produced by the investment, which we refer to as the matching principle. By<br />
drawing only the income produced, investors can be assured that their capital base will not be<br />
eroded (the biggest contributor to longevity risk).<br />
To achieve this the Marriott Essential Income Fund invests exclusively in companies that have<br />
been able to pay reliable and growing dividends consistently over thelong term such as Clicks,<br />
Reliable, growing income<br />
When an investor requires an income from<br />
their investment, Marriott recommends<br />
drawing only the income produced by<br />
the investment, which we refer to as the<br />
matching principle. By drawing only the<br />
income produced, investors can be assured<br />
that their capital base will not be eroded (the<br />
biggest contributor to longevity risk).<br />
To achieve this the Marriott Essential Income<br />
Fund invests exclusively in companies that<br />
have been able to pay reliable and growing<br />
dividends consistently over the long term,<br />
such as Clicks (see graph below), Growthpoint,<br />
Sanlam and Standard Bank.<br />
Growthpoint, Sanlam and Standard Bank. The dividend track records of these companies are<br />
illustrated below:<br />
Optimal long-term asset allocation<br />
The Essential Income Fund currently produces<br />
a gross yield of 6.9%, which should grow in<br />
line with inflation over time. This has been<br />
achieved through investing in an optimal<br />
2. Optimal long-term asset allocation<br />
mix of both growth and higher-yielding asset<br />
The Essential Income Fund currently produces a gross yield of 6.9% which should grow in line<br />
classes, with inflation over as time. outlined This has been achieved in the through table investing in an below.<br />
optimal mix of both<br />
growth and higher yielding asset classes as outlined in the table below.<br />
Asset Class<br />
Asset<br />
Allocation<br />
Current Income<br />
The Fund's asset allocation will remain relatively stable over time as we believe this is the right<br />
mix for fund's investors looking asset for the highest allocation sustainable level of inflation-hedged will remain income. relatively<br />
3. Low cost stable over time as we believe this is<br />
The annual management fee of the portfolio is 0.75% which is highly competitive.<br />
the right mix for investors looking for the<br />
highest sustainable level of inflation-hedged<br />
income.<br />
Low cost<br />
The annual management fee of the portfolio<br />
is 0.75%, which is highly competitive.<br />
Investor benefits<br />
A combination of an income focused investment<br />
approach, with an optimal long-term<br />
asset allocation and a low fee results in a<br />
number of key investor benefits, which are<br />
outlined below:<br />
Yield<br />
Long-Term Income<br />
Growth<br />
SA Equities 40 - 50% 4.0% 8 – 10 %<br />
SA Property 25 - 35% 9.0% 3 - 5%<br />
SA Long Term Bonds<br />
(15year)<br />
20 - 30% 9.6% 0%<br />
Cash 5% 7.0% 0%<br />
Portfolio Total 100.0% 6.9% 4 - 6%<br />
Source: Marriott<br />
1. Sustainable income – no longevity risk<br />
By investing in assets that produce reliable<br />
and growing income streams, our incomefocused<br />
approach looks to match the income<br />
requirements (rand liabilities) of retirees with<br />
the income produced by their capital (rand<br />
assets). Investors can therefore live off the<br />
income produced by their investments without<br />
eroding capital, which effectively eliminates the<br />
risk of running out of capital post-retirement.<br />
2. More Income – higher drawdowns<br />
The Essential Income Fund combines the<br />
benefits of both traditional living annuities<br />
and guaranteed annuities by enabling an<br />
investor to draw a higher level of sustainable<br />
income with increased flexibility (access/<br />
ability to leave a legacy). The fund’s current<br />
net income yield is approximately 6%, which<br />
is significantly higher than the generally<br />
accepted 4% “safe” withdrawal rate when<br />
relying on unpredictable capital growth to<br />
fund the annuity.<br />
3. Exposure to quality companies<br />
The cornerstone of the Essential Income Fund<br />
is exposure to only the highest-quality South<br />
African dividend-paying companies (property<br />
and equities) and government bonds. The<br />
companies we select are responsible for<br />
generating the income for our investors into<br />
perpetuity; therefore, investing in quality<br />
businesses that are able to continually grow their<br />
earnings through all cycles is paramount. Over<br />
the long term, companies of this nature tend to<br />
produce solid income and capital returns.<br />
Summary<br />
Subdued returns and endless choice have<br />
left many retirees feeling anxious about their<br />
financial futures. Using the Essential Income<br />
Fund to “spend the income not the capital”<br />
will get your retirement plan back on track.<br />
For more information on the fund please visit<br />
Marriott’s website (www.marriott.co.za).<br />
64<br />
www.bluechipjournal.co.za
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