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Blue Chip Issue 79

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This 79th issue of Blue Chip focuses on the art, science and business of investment. Blue Chip is the financial planner’s chaperone to everything investment and this edition is a smorgasboard of the choices, decisions, lessons and associations that relate to it.

RETIREMENT SHARED VALUE

RETIREMENT SHARED VALUE – another It has been said that shared value has the potential to redefine businesses across the globe, but it’s not always clear how the theory plays out, and what its full potential is. To help us understand its potential impact in the retirement space, we chatted to Head of Research and Development at Discovery Invest, Craig Sher. trend… or the key to transforming retirement? In a nutshell, what is shared value? Shared value is the idea that when companies focus on addressing societal needs, they can become more profitable and simultaneously create value for everyone. So for example, in investing, the goal is for all the stakeholders – the individual investor, the investment provider, and society at large – to share the value that’s created when individuals do what is best for themselves. How would a company apply shared-value principles in practice? You’d start with identifying a relevant societal challenge. In Discovery Invest’s case, we looked at South Africa’s bleak retirement statistics and asked ourselves what we could do to improve them. The National Treasury reports that only 6% of South Africans have enough saved for retirement. The key insight we have found is that, in many cases, the problem is behavioural. The retirement challenge boils down to three main savings behaviours: people start saving too late, they don’t save enough, and in retirement, they often withdraw too much without anticipating how long the money needs to last. This is further exacerbated by the fact that people are living longer, and so their retirement savings need to last longer. When Discovery focused on how to improve these specific behaviours, we found that if clients did what was in their best interests, we made more profit. Clients did better because they had better retirement outcomes and our business did better because we earned fees for longer and on higher fund balances. All of this is also extremely positive for society at large. Craig Sher, Discovery Invest Undoing ingrained habits is notoriously difficult. How do you convince people to change the way they act? We do it with benefits and rewards that almost feel “too good to be true”. For example, we offer upfront investment boosts of up to 20% for money that is saved. The earlier one starts, the bigger the boost, but the key is that people have to remain invested to retirement to keep the boost, which encourages them to stay the course. On top of this, people can get even higher boosts for adding additional amounts each year. When people reach retirement, we give up to 50% extra income when people withdraw their money responsibly, and stay healthy. These benefits encourage the right investment behaviours from clients as they end up doing the right thing in order to maximise their boosts and rewards. Importantly, we don’t cover the costs of these boosts through any extra loadings or fees within the product; they are possible only if – and because – our clients change the way they behave towards retirement savings. Only 6% of South Africans have enough saved for retirement. The million-dollar question: is shared value just another global trend, or does it actually work? It works. And once you see it in action, there’s no going back. Since 2015, when we started our shared-value approach to investing, we’ve tracked and seen the following: • On average, Discovery Invest clients invest three years longer, and over 120% more in additional contributions, after introducing behavioural incentives. Our analysis shows that small behaviour changes like these can double retirement outcomes. • Our clients are also more likely to stay invested. A statistical analysis on our retirement clients shows that our boost is the biggest predictor of a client staying on track for retirement, with our average lapse rate being 28% lower than expected rates. So if you let the numbers speak, they say it loud and clear: Discovery’s shared-value approach really does have the power to transform South Africa’s retirement landscape. 26 www.bluechipdigital.co.za

PASSIVE INVESTING 3benefits of using passive investing in your portfolio While the big shift to passive investing is yet to play out in South Africa, passive funds are undoubtedly gaining momentum, albeit off a low base, as investors seek diversification at a lower cost. “ In South Africa, where equity market returns have been disappointing over the last five years, investors have acknowledged the need to diversify across asset classes and geographies without jeopardising long-term gains,” says Wehmeyer Ferreira, executive director of specialist index tracking provider 1nvest, a collaboration between Standard Bank, Liberty and STANLIB. Consequently, passive investment products such as Exchange Traded Funds (ETFs) and index tracking unit trusts are gaining momentum as they provide a cost-effective and efficient way of achieving diversification and reducing overall risk in an investment portfolio. “We saw more than ZAR22-billion of 1nvest commodity ETFs trade on the JSE by end-2020.” An affordable avenue to diversification Because passive funds track a benchmark or index and are not based on a fund manager exercising discretion, they can be delivered at lower fees than actively managed funds. For example, investors can access the 1nvest Top40 ETF for a 0.25% management fee per annum. Ferreira explains: “The Global Financial Crisis (GFC) triggered a series of events that put fees under the spotlight. Firstly, it created distrust between institutions that form part of the financial system and the man in the street that buys financial products. Secondly, we entered an environment globally where yields and returns across asset classes were lower than ever before. And thirdly, increased regulation forced more transparency on disclosure, especially around fees.” These three events were the main drivers behind fee revolutions and the rise of passive funds globally over the last 10-12 years. Access to different exposures While the passive investing market is still small in South Africa, the country has experienced a boom in new ETFs and index tracking unit trusts. 1nvest offers a comprehensive range of top-performing, easily accessible ETFs and index tracking unit trusts that investors and their financial advisors can utilise to create or enhance a portfolio. This selection includes funds that provide access to multiple asset classes such as equities, fixed income, property and commodities. “With lacklustre returns from the local market and heightened risks to the domestic environment, geographical diversification has become essential. Increasingly, investors are allocating a larger portion of their portfolios to offshore,” Ferreira notes. It has become much easier nowadays to access offshore markets using index tracking funds. 1nvest’s funds rewarded investors in 2020, with the 1nvest S&P 500 Index Feeder Fund returning 22.33% during the year. The 1nvest MSCI World Index Feeder Fund returned 21.56% while the 1nvest Global Government Bond Index Feeder Fund returned 14.50% during the period. Ferreira says that, “products range from very well diversified asset class exposure, like the 1nvest MSCI World Index Feeder Fund, to very niche, like the 1nvest S&P 500 Info Tech Feeder Fund”. Globally, in the US specifically, the technology sector has emerged as the dominant driving force behind the performance of equity markets. This is reflected in the performance of the 1nvest S&P 500 Info Tech Index Feeder Unit Trust, which returned 48.31% in 2020. “We have seen a marked increase of use of the 1nvest commodity ETFs by our clients wishing to invest and trade precious metals,” Ferreira explains. “We saw more than ZAR22-billion of 1nvest commodity ETFs trade on the JSE by end-2020.” The 1nvest Rhodium ETF, which is currently the only one of its kind on the African continent and one of two in the world, returned a remarkable 187.14% to investors in 2020 – up from 140.9% in 2019. Over the last three years, it delivered an annualised return of 124.96%. Lowers the risk of underperformance The shift to passive investing, Ferreira says, has been aided by the struggle of active fund managers outperforming the benchmark through a cycle. “The lack in persistency and predictability of outperformance has created headaches for fund allocators and advisors as they need to spend a disproportionate amount of time reviewing fund managers and performance.” This is not to say that there isn’t a place for both active and passive strategies in an investor’s portfolio. “Index exposure can coexist with active funds. Increasingly, clients are adding passive exposure in their portfolios to enhance their overall outcome. This allocation will depend on the person’s individual circumstances, such as investment time horizon and appetite for risk.” www.bluechipdigital.co.za Wehmeyer Ferreira, Executive Director of 1nvest 27

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