Your guide to the best investment portfolio
Looks at the options offered by life assurance companies
IN DECADES past, buying an insurance-based investment was simple enough - you paid your premiums and waited for the eventual payout.
Nowadays, you are called upon to choose the underlying investment portfolio in which your money will be invested and the choice can be confusing. Do you invest in equities, cash, offshore or in a mix of all three?
You are offered a choice of portfolios when you buy a retirement annuity, endowment policy, life insurance or preservation plan. Some life companies have a wide range while others offer only one or two portfolios.
Once you have made an investment choice, you are usually allowed to switch between portfolios, although each assurer has its own restrictions and costs.
Money asked the experts to explain the various portfolios on offer, the objectives of each and which type of investor each portfolio is most suited to.
Francois Marais, chief marketing actuary at Sanlam Life, and Danie van den Bergh, head of individual life marketing at Momentum Life, explain that all portfolios can be split into two broad categories - the returns on your policy will either be market-related or they will be smoothed.
SMOOTH BONUS PORTFOLIO
Some assurers alternatively call this as a balanced portfolio, a stable bonus portfolio or a guaranteed portfolio.
It is the traditional type of portfolio where the assurer smoothes the annual investment performance by taking away from the actual return in good years and adding back in bad years.
The underlying assets are generally 60% invested in equities, with the balance being spread between property, fixed interest investments and cash.
The assurer declares the smooth bonus growth rate annually, and retrospectively.
Part of the bonus vests, which means it is guaranteed and cannot be taken away in future years, and part of it does not vest, meaning that if future years are really bad, the assurer can take that return away.
For example, the assurer may declare a 14% smooth bonus rate at the end of the year, with 9% of that vesting. The 9% is guaranteed and cannot be taken away from you, but the 5% non-vesting portion of the return can be taken back if the following year's performance is poor.
So far, no assurer has had to reduce the non-vesting portion.
The bonus rate is usually declared at your assurer's year-end (most of which are in December, with some in March or June).
At the same time the assurer will declare an interim bonus. This is the return rate to be applied to policies that will mature in the following year before the declaration of the next bonus (it takes into account expected growth in the interim period).
The interim bonus rate is based on the assurer's investment forecast for the year ahead and is usually slightly lower or the same as the annual bonus rate.
A variation of this type of portfolio is that some companies will sell a product where the full bonus is vesting. However, this is usually for a more conservative portfolio, and chances are that the bonus rates will be slightly lower.
Objective: A low-risk investment portfolio providing stable growth over a minimum of five years. The returns aim to be about 3% above the ruling inflation rate.
Investor profile: Those who are close to retirement and want a growth-oriented investment while protecting their invested capital.
These are also referred to as market-value or market-linked portfolios.
The annual investment performance is not smoothed and the returns are related to the actual performance of the underlying assets.
So, if you are invested in equities and the stock market tumbles, your investment performance will follow suit; and when the market flies, so will the value of your investment.
There are different types of market-related portfolios, but they all work on the same principle - when you buy into a portfolio you are effectively buying units in it.
The price of these units is determined either daily or monthly.
To reduce the risk of loss from market fluctuations close to the maturity of your investment, most insurance companies "freeze" the market value of your fund two months ahead of the due date. In these two months you earn interest.
Marais says Sanlam now offers you the choice of freezing the value of your policy in the last two months, or leaving it fully exposed to the market.
The various portfolios on offer under this category are: balanced, specific (such as pure equity), offshore, and the new breed of index-type portfolio.
A recent development offered by some assurers is for you to invest in the company's own unit trust funds.
These are also referred to as managed funds or general asset portfolios.
They are invested about 60% in equities with the balance in property, cash and gilts, and generally come with a guarantee that the portfolio will show a return of at least 4% to 5% over the term of your policy.
Objective: To provide returns over the medium and long term about 4% above the inflation rate, but still with some guarantee.
Investor profile: For those who want a higher return than that offered by the smooth bonus portfolio and who are prepared to take on a slightly higher risk.
Also for you if you want growth rather than income from your policy.
Pure equity portfolios
This type of portfolio is totally invested in SA equities. It is aggressively managed and performance tends to be volatile. But it gives the opportunity for exceptional returns, provided the fund manager reads the market correctly!
There are no guarantees on the investment performance of this fund.
Objective: To provide excellent capital growth over the medium and long term.
Investor profile: For those with sufficient capital and a long enough investment horizon to bear the higher risk. In other words, this portfolio is too risky if you will be reliant on the income stream in the near future, or if you need to protect a small capital base off which you need to live during retirement.
Money market portfolios
This is a pure cash investment offering good returns in the current high interest rate environment.
Marais believes it is not a good investment for the long term as the interest is fully taxed.
He says, however, it is a good place to park funds if you want to get out of the equity market in the short term.
Objective: To provide a full capital guarantee and to give a yield (return) equivalent to what the wholesale money market would offer.
Investor profile: If you are ultra conservative or waiting for the equity market to stabilise before reinvesting, this one is for you.
These investment portfolios can either be balanced or pure equity.
They also come in a variety of flavours - some are region-specific, some follow a world markets index and some invest in high-risk developing countries.
The majority of these funds are linked to a world index, and with 80% to 90% invested offshore.
Because of exchange control regulations, institutions are only able to acquire foreign assets through asset swaps (this means that the assurer has to pay for the foreign asset with a local asset).
As foreign investors are not falling over themselves to invest in SA right now, institutions generally have to pay a premium to get the foreign holdings. This is usually in the order of 5%, although it depends on foreign sentiment towards SA.
The result is that you will pay a premium to get your offshore investment.
Objective: To provide growth and diversification and to reduce currency risk by investing in a range of global assets.
This is a fairly high risk investment because returns are dependant on the performance of the underlying global assets and on the value of the rand. This type of portfolio does not come with any guarantee.
Investor profile: For those wanting offshore exposure in their asset allocation.
However, this is not suitable for those of you who are nearing retirement and do not have much capital set aside.
These new derivative-based portfolios with specific guarantees are starting to be offered by assurers to more sophisticated investors.
The assurer may, for example, guarantee your capital and offer at best 20% growth over the term of the policy. This means that however the market performs, the worst growth you will get is 0% and the best 20%.
This is a fairly conservative investment but not as conservative as the smooth bonus products.
Objective: To track a certain index, such as the JSE's Alsi 40 or the industrial index, and to provide certain guarantees such as those mentioned in the above example.
Each assurer packages its products differently and provides different guarantees.
Investor profile: If you are a more sophisticated investor who wants a market-related return with lowish risk and some guarantee, this one is for you.
A number of assurers allow you to choose from certain of their in-house unit trusts as the underlying investment in your insurance policy.
The risk profile of this portfolio depends on your chosen unit trusts.