DEFINED CONTRIBUTION

INVESTMENT OPTIONS

Overview

Did you know that your benefit in the Cape Municipal Pension Fund is probably the single largest asset you will ever own? Most people do not realise this.

Also, did you know that very few people worry about whether they will have enough money for their retirement until closer to the time? Of course the problem with this is that you may be left with too little time to rectify the situation should it emerge that you have made insufficient provision for your retirement.

As a member of the defined contribution section of the Fund the investment returns earned by the Fund have a direct impact on the amount of your retirement benefit. Given that this is probably the largest asset you will own, it is probably worth thinking more about its investments and the risks you face now.

The Fund provides an automatic investment plan (the so-called life stage model), which is intended to build members' retirement capital prior to retirement and protect this capital as retirement approaches.

The assets in which the Fund invests your money are equities, bonds and cash. These asset classes are available both in South Africa and offshore.

One cannot explain all the intricacies of these asset classes on a website such as this but the following provides an overview.

Equities (or shares)

When the Fund owns the equity (or shares) of a company, it effectively owns part of that company. Equity prices are sometimes affected by market sentiment. Sometimes investors are negative towards the market and even if the company in which you have invested is doing well, its share price may still fall in value.

Equities can be bought and sold on "stock exchanges" throughout the world. The South African stock exchange is called the Johannesburg Securities Exchange (JSE).

The two main features of equities (compared to bonds and cash) are:

  • Historically, over the long term, equities have been the asset class that provided the highest investment return; and
  • Equities have had the highest volatility (or risk) of reducing in value, especially over shorter measurement periods.

This makes sense - higher returns are usually associated with taking on more risk.

Bonds

The South African Government (and some large companies like Transnet, Telkom, ESKOM and SASOL) are regular borrowers of money. So, they issue bonds that invite investors (like the Fund) to lend them money. The bond will set out the interest the borrower will pay, and the date on which the loan will be repaid.

The market value (price) of a bond at any point in time depends on interest rates and, importantly, that price can decrease. By way of example, let's say the Pension Fund owns a bond that is worth R1 million, which is currently earning 10% per annum. If interest rates now increase to 13% per annum, the market value of the bond will fall because no investor will be prepared to pay R1 million to earn a 10% return when they now can earn 13%!

The extent to which the price of a bond falls (rises) if interest rates rise (fall) depends on the period before the loan is repaid. If the repayment of the loan is a long way off, the investor will look for a much lower price because he/she needs to be compensated for the difference between 13% and 10% for a longer period.

Government bonds and other large corporate bonds can be bought and sold easily on the FTSE / JSE and other world markets.

Over the long-term bonds are expected to provide a lower investment return than equities, but a higher return than cash. Bonds are less volatile (or risky) than equities.

The interest earned on bonds is no longer subject to Retirement Fund Tax.

Cash and near cash investments

Such an investment is like your bank savings account or a 6-month fixed deposit. Government bonds that have a term of less than 12 months before the loan is repaid are regarded as "near cash" investments. Such investments are also called "money-market instruments".

Because such investments have a very short term (i.e. less than 12 months) they are much less affected by changes in interest rates than bonds and are the least risky of the three asset classes described above.

Cash and "near cash" is expected to provide the lowest return of all the asset classes over the long-term.

It is important to emphasise that investing in cash in not entirely risk free. In certain market conditions the Institution with whom you invest your money may default.

The interest earned on cash is no longer subject to Retirement Fund Tax.

Global investments

Investments in equities, bonds and cash can be done either in South Africa or globally. The Fund will only invest in global equities and bonds.

The main additional factors introduced by global equity investment are: -

  • The Fund can be exposed to the companies that are "best of breed" in the world.
  • The SA equity market is very small (it represents less than 1% of the total world stock market capitalisation). By investing offshore the Fund is exposed to a much wider opportunity set of investments.
  • The fund is exposed to currency changes. Say, $1 currently costs R10 and the Fund invests R10 million in the USA(i.e. $1 million). If the Rand now "weakens" so that $1 now costs R12, the Fund will profit since its $1 million investment is now worth R12 million.

Of course, there is the risk that the Rand can appreciate against the US Dollar, in which case one loses money on your offshore investment.

  • There is different investment risk in different countries. For example, the US stock market has historically been less risky than the FTSE/ JSE.

Investing in global bonds has broadly similar advantages to those described above.

It is important to emphasise that the primary benefit from investing offshore relates to the diversification. Such diversification gives you greater protection should investment returns in South Africa be poor.

Over the long term one would expect, on average, South African investment returns to exceed those earned on the equivalent asset class in the developed world, simply because the risk of investing in South Africa is higher.

As a member of the defined contribution section of the Fund your retirement benefits will depend on two factors, namely:

  • How much money you, together with your Employer, save (contribute) monthly for your retirement; and
  • Most importantly, the investment returns you earn on these contributions.

You carry the risk of whether the investment returns earned on your pension saving contributions will be sufficient to provide you with a reasonable income at retirement.

So, it is crucial that you understand what investment risks impact on you and how best you can manage these risks. In this regard you are exposed to two main risks, namely Inflation risk and Final payment risk.

Inflation risk

This refers to the risk that the money that you and the City of Cape Town set aside monthly as your pension saving (currently 20% or 21% of your pensionable salary) does not earn sufficient investment returns to provide a reasonable retirement benefit.

For an average employee with a full career, you need your investment returns to be something like 4.5% per annum higher than price inflation (after allowing for investment manager fees and retirement fund tax) to provide for reasonable retirement benefits. By a reasonable retirement benefit we mean that an employee with 35 years service and an average career progression would be able to retire with a pension of some 85px% - 95px% of his/her pensionable salary at retirement.

As a general rule, the further you are from retirement, the more you are exposed to inflation risk.

Final payment risk

This is the risk you face when your investment horizon becomes rather short - the key risk is that when you receive your benefit the market is at a low point (e.g. March 2003).

Your final payment risk generally becomes more acute as you approach retirement. The following examples highlight the nature of "final payment risk" and whether this risk applies to you or not:

  • You will be retiring from the Fund shortly. At that time you intend securing a life annuity from the Fund (or an insurer). The initial pension you will receive will depend critically on your Member Credit at retirement. In this example you face "final payment risk" (and have a short investment horizon) because you do not want your Member Credit (and consequently your initial pension) reduced by the chance of large negative investment returns.

  • You will be retiring from the Fund shortly. At that time you intend securing a living annuity. In this case you may still face some final payment risk, as you may want to take 1/3rd of your retirement benefit in cash (and may also wish to apply some of your money towards a life annuity).

    However, you probably still have a long-term investment horizon for that part of your Member Credit you will invest in a living annuity. If the market is low at the time you retire you should ideally only draw a low percentage of the money you have invested in a living annuity as a pension. This means that the bulk of your money will remain invested in the market and should thus benefit from any upswing in the market.

  • You are 20 years' from retirement and will be resigning soon. You intend preserving your resignation benefit for your retirement. In this case you have a long investment horizon and do not face final payment risk.
  • You are 20 years' from retirement and will be resigning soon. You intend using your resignation benefit to pay off your house bond. In this case you face final payment risk because if the market goes down sharply you will have less to repay your house bond.

    Since it is expected that most members will elect a life annuity at retirement, as a general rule, the closer you are to your retirement age, the more you are exposed to "final payment risk".

NOTE: With effect from 1 January 2012 the Life Stage Model for the investments of Defined Contribution in-service members has been changed.

The former Life Stage Model

The former Life Stage investment model, for Defined Contribution in-service members (which was implemented with effect from 1 December 2008), envisaged that the member will be transitioned from the Market portfolio to the Cash portfolio, in five stages from age 53 to age 57.  This means the member will be invested 100% in money market assets for the last three years before the assumed retirement age of 60. 

The Stable Portfolio was previously the portfolio used for the Life Stage model in place of the Cash Portfolio. The change in 2008 was made on a tactical basis, as the Multi-Manager Smooth Growth Fund was under-Funded at that time (i.e. for every R1 of new money invested, the share of the underlying assets acquired would have been worth less than R1) and it did not make sense to continue investing in those circumstances.

However, at the time of the introduction of the above Life Stage Model, the Stable Portfolio became closed to new entrants. Members who had part of their Fund credits invested in the Stable Portfolio remained invested in this portfolio (unless they opted out as “own choice” members.) 

Why was the Life Stage Model changed?

After research and discussion, the Trustees of the CMPF decided to explore various alternatives for the Life Stage Model. They felt that the current transition from Market to Cash over five years, which in some cases starts as early as 12 years before the member’s normal retirement age (NRA) in cases where the NRA is 65, is too conservative. In exploring the alternatives, their focus remained on offering members high protection as members get close to retirement age, while investing less conservatively than the current model.

The Fund has different Normal Retirement Ages, depending on when a member joined the Fund. Due to the varying normal retirement ages, the Trustees decided to rather accommodate the situations of members who retire with a normal retirement age of 60, 62 or 65.

For this reason, it was decided to rather devise a life stage model that takes a member’s number of years remaining until the member’s NRA into consideration, rather than assuming everyone will retire at age 60.

Furthermore, a Low Equity Balanced (LEB) Portfolio was introduced in 2011. Communication in this regard was sent out to all members explaining how this LEB Portfolio works. At the time it was implemented, it was an “Own Choice Portfolio” and not part of the Life Stage Model. With the implementation of the new Life Stage Model, it was decided to incorporate the LEB Portfolio into the Life Stage Model as one of the building blocks in the transition phase. The other two portfolio’s used in the new Life Stage model are the Market Portfolio and the Cash Portfolio.

New Life Stage Model

The new Life Stage model is therefore as follows:

 

Allocation of   Member Credit

Allocation of   Future Contributions

Years remaining until   member’s Normal Retirement Age

Market Portfolio

LEB Portfolio

Money Market Portfolio

Market Portfolio

LEB Portfolio

Money Market Portfolio

More   than 6 years

100%

0%

0%

100%

0%

0%

6   years (month-end following the member’s birthday 6 years before NRA)

50%

50%

0%

0%

100%

0%

5   years

0%

100%

0%

0%

100%

0%

Between   5 years and 2 years

0%

100%

0%

0%

100%

0%

2   years (month-end following the member’s birthday 2 years before NRA)

0%

50%

50%

0%

0%

100%

1   year

0%

0%

100%

0%

0%

100%

 

To explain this more clearly, below are different tables which sets out the details of the transition of the member credit between the portfolios for the different Normal Retirement Ages:

MEMBERS WITH A NORMAL RETIREMENT AGE OF 60:

 

Allocation of   Member Credit

Allocation of   future contributions

Month following birthday

Market Portfolio

LEB Portfolio

Money Market Portfolio

Market Portfolio

LEB Portfolio

Money Market Portfolio

53 and younger

100%

0%

0%

100%

0%

0%

54

50%

50%

0%

0%

100%

0%

55

0%

100%

0%

0%

100%

0%

56

0%

100%

0%

0%

100%

0%

57

0%

100%

0%

0%

100%

0%

58

0%

50%

50%

0%

0%

100%

59

0%

0%

100%

0%

0%

100%

 

MEMBERS WITH A NORMAL RETIREMENT AGE OF 62:

 

Allocation of   Member Credit

Allocation of   future contributions

Month following birthday

Market Portfolio

LEB Portfolio

Money Market Portfolio

Market Portfolio

LEB Portfolio

Money Market Portfolio

55 and younger

100%

0%

0%

100%

0%

0%

56

50%

50%

0%

0%

100%

0%

57

0%

100%

0%

0%

100%

0%

58

0%

100%

0%

0%

100%

0%

59

0%

100%

0%

0%

100%

0%

60

0%

50%

50%

0%

0%

100%

61

0%

0%

100%

0%

0%

100%

 

MEMBERS WITH A NORMAL RETIRMENT AGE OF 65:

 

Allocation of Member Credit

Allocation of future contributions

Month following birthday

Market Portfolio

LEB Portfolio

Money Market Portfolio

Market Portfolio

LEB Portfolio

Money Market Portfolio

58 and younger

100%

0%

0%

100%

0%

0%

59

50%

50%

0%

0%

100%

0%

60

0%

100%

0%

0%

100%

0%

61

0%

100%

0%

0%

100%

0%

62

0%

100%

0%

0%

100%

0%

63

0%

50%

50%

0%

0%

100%

64

0%

0%

100%

0%

0%

100%

 

Important Assumptions of the new Life Stage Model

The new Life Stage Model is based on a number of important assumptions:

The life stage model assumes that you will retire at age 60, 62 or 65 in terms of the rules of the Fund.

So, if you intend to retire at age 55, you may wish to consider transitioning your retirement savings in the LEB Portfolio from age 49 onwards (as opposed to age 54 as would be the case with the life stage model). Importantly, this is your own choice and will not be done automatically by the Fund - you will need to indicate this choice by sending in a completed Investment Choice Option Form.

Your money will automatically be invested according to the life stage model unless you make a positive choice to invest your money in another way (i.e. your choice of one or more of the own-choice portfolios).

The model is also based on an “average risk appetite”. To the extent that your risk appetite is more conservative or aggressive than average, the life stage model may not be appropriate. You will then need to opt out of the life stage model.

What happens to members who are still “in transition” under the old Life Stage Model?

There are numerous members aged 53 and over who are currently in transition – many of these still have investments in the Stable portfolio as well as the Cash portfolio (and the Market portfolio). For these members, the old Life Stage model will be continued in its current form, as shown below, with switches being made from the Market Portfolio into the Cash Portfolio. 

Staying on the old model means these members will be very conservatively invested for a number of years up to their NRA. If such members feel this is unsuitable for their own needs and circumstances, they will have to make their own investment decisions and “opt out” of the Life Stage model.

 

Allocation of Member Credit

Allocation of future contributions

Month   following birthday

Market Portfolio

Money Market Portfolio

Market Portfolio

Money Market Portfolio

53

80%

20%

0%

100%

54

60%

40%

0%

100%

55

40%

60%

0%

100%

56

20%

80%

0%

100%

57

0%

100%

0%

100%

 

Will I be forced into this change on 1 January 2012?

If the Life Stage default model applies to you (i.e. you have chosen NOT to make your own investment choices in the Fund) - unless you complete an Investment Choice option form indicating how YOU wish your money to be invested, the new Life Stage model will apply to you, or for those members in the transition phase (who are aged 53 or older on 31 December 2011), you will remain on the existing Life Stage Model.

In other words, if you do not complete and submit an Investment Choice Option form, you will automatically be placed in either the new Life Stage Model or remain on the existing Life Stage Model. 

If the Life Stage default model does NOT apply to you (i.e. you have chosen to make your own investment choices in the Fund), none of the above will affect you.

 

Choosing your own portfolios

You may make a positive election to invest your Member Credit and future pension savings contributions in a different way to the Life Stage Model. You will need to inform the Fund of this election by completing an Investment Choice Option Form.

You should be careful in using an own choice portfolio in an attempt to "time the market". There is strong evidence that professional investment managers are not able to time the market correctly on a consistent basis (see the common mistakes section below).

Portfolios available

You may elect to invest your money in any of, or combination of, the:

  • Market Portfolio
  • Low Equity Balanced (LEB) Portfolio
  • Shari'ah Portfolio
  • Money Market Portfolio

Bear in mind that there are still members whose Fund Credits are fully or partly invested in the Stable Portfolio and those members should particularly note the penalty that may apply in adverse market conditions if you want to switch out of the Stable Portfolio.

If you elect to take a housing loan directly from the Fund, you will in effect be investing your retirement savings in a fourth investment channel (please see the section dealing with Housing Loans).

Range of choice you have

You may make a separate choice of how you want to invest your Fund Credit and how you would like to invest your future pension savings contributions. For example, you may choose to invest your Fund Credit in the Low Equity Balanced Portfolio and your future pension savings in the Market Portfolio.

Investment Switching

What is switching?

If you make a voluntary choice to change part or all of your retirement fund investment from one portfolio to another, this is a switch. It is voluntary, and requires your specific instruction.

Are there any restrictions on switching between the portfolios?

There are no restrictions on how you can allocate your money between the portfolios. For example you can invest your future contributions differently from your accumulated retirement savings.

When can I switch?

Members may change their investment choice on a monthly basis.

What do I need to make the instruction?

You will need to complete an Investment Choice switching form. These forms are available from the Pension Fund Offices.

To whom must I send my instruction?

The completed switching form must be sent to Alexander Forbes by following the instructions on the switch form. It is your responsibility to ensure that Alexander Forbes receives this form. The fax number is (011) 263 294px8.

What are the deadlines?

You must inform the Fund’s administrator by the 10th of the month if you want a switch to be implemented on the first day of the next month. (If you do not submit your option form before this cut-off date, your switch will be implemented on the first of day of the month two months hence).

What happens after I have made my instruction?

The administrator will transfer the money between the investment managers, and will amend your Fund record to allocate your retirement savings to your new portfolios.

How will I know my instruction has been carried out?

It is your responsibility to ensure that the Fund’s Administrator has received your option form.

What is the cost of switching?

In each financial year you will be entitled to one free switch.

You will be charged for any additional switch in the 12-month period. At this time the fee is R300 plus VAT, which will be deducted from your retirement savings at the time of the switch.

Why will I be charged for additional switches?

The administration fees that the Fund pays include an allowance for a certain (assumed) number of members to make one switch in each 12-month period. The administration costs of any additional switches must be passed to the member who uses the facility more frequently. The principle is that the “user pays”. Members who do not switch frequently will not wish to subsidise those who do.

The trustees do not expect that the switching facility will be widely or frequently used.

Are these charges fixed?

The switch charge is a fixed Rand amount. It is not affected by the amount of money that you switch.  Note that the trustees may decide to increase the charge at some stage in the future.

Are there any investment penalties if I switch?

There are no penalties on switching out of any of the portfolios, except for those members that have part or all their money invested in the Stable Portfolio, who may be affected by switching penalties in some circumstances. You should refer to the Fact Sheets at the end of this guide to understand the performance characteristics of the various portfolios as well as the possible switching penalties of the Stable Portfolio.

Can I opt back into the Life Stage Model?

If you at any timemake a positive choice to invest differently from the Life Stage portfolio, then in future you will always need to advise the Fund if you want to switch portfolios- this means that you cannot opt back in to the Life Stage Model.

Although it may be attractive to construct your own portfolio, it is worth pointing out the following two common mistakes members make with own choice portfolios.

Choose an investment strategy that is too conservative

The South African and international experience is that when faced with investment choice, members often choose too “conservative” a channel relative to the risks they face. This error can have material negative financial consequences.

For example, if a 25-year old member decides to invest his/her retirement savings in the Money Market Portfolio over his/her entire working life (i.e. for 35 to 40 years), he/she could end-up with a pension some 40% to 60% less than had he/she invested more appropriately according to the life stage model.

So, if you are young and you are not concerned about your “final payment risk”, you should invest primarily to manage your inflation risk as the life stage model does automatically.

Trying to “time the market”

Experience shows that some members believe that they can “time” the share market. This means they try to get out at the “top of the share market” and buy back in at the bottom of the share market (i.e. they aim to get both decisions right).

The reality is that the vast majority of expert investment managers cannot “time” the market effectively. Expressed another way, it is very difficult to get the market “timing” right consistently.

The evidence to date shows that Pension Fund members who try to “time” the market almost always get it wrong. In fact the evidence shows that members expose more money to the equity market when it has gone up sharply (possibly the worst time to do so) and avoid the share market after a sharp fall (typically the best time to get back into the share market).

If you can time the market correctly consistently, you are almost certainly in the wrong job!

Investment objective

The investment objective of the Market Portfolio is to achieve a real return (after deducting investment management expenses) relative to SA price inflation of 5% p.a. over the longer term. Please note that this level of return is not guaranteed and will depend critically on market conditions.

Asset allocation

The envisaged strategic asset allocation of the Portfolio is shown in the chart below:

Thus the portfolio has a 70% strategic allocation to equities and 30% strategic allocation to bonds and cash.

The actual allocation of the portfolio will vary within pre-defined parameters around this strategic asset allocation. This means that the actual asset allocation will not always correspond exactly to the pie chart.  The trustees may also decide to make changes to the investment strategy from time to time – this could affect the asset allocation as well as the choice of investment firms to manage the portfolio.

Performance characteristics

This portfolio does not provide a guarantee. It aims to deliver a good return relative to inflation. It has a long-term investment horizon and one should only measure its performance over a minimum of 5 years or longer.

About 65% of the SA equity component is managed according to a contrarian long term investment style, and all the current international equity managers have a similar valuation bias. Given the strong focus such investment managers have on placing a fair value on the long term value of a Company (and only buying “bargains”), they are likely to under-perform the market significantly when sentiment dominates. Market sentiment dominates pricing at the top of a mature bull market or at the bottom of the bear market. 

The performance of this portfolio is thus likely to be somewhat different from that of the average Retirement Fund, as represented in the published investment surveys – generally delivering better performance in weak markets, but under-performing at the bottom of the bear market and the top of a mature bull market.

Investment managers

The current investment managers for the Portfolio are:

  • SA equities: Allan Gray Limited, Coronation Asset Management, Investec Asset Management; Afena Capital and ABAX

  • SA bonds and cash: Investec Asset Management, Prescient Investment Management and Future Growth Asset Management

  • International equities: Brandes Investment Partners, Hosking & Co, Veritas Asset Management, Contrarius Investment Management and Walter Scott & Partners Limited

  • International bonds: Colchester

The manager targets are to outperform specific market indices. The Trustees will change the investment manager if they become concerned that the manager will not deliver the required level of investment performance to the Fund.

Charges

You are credited with a net investment return each month - this means that investment management fees and other expenses, such as custody fees, have already been deducted.

Investment objective

The investment objective of the Stable Portfolio is to earn an investment return (after fees and charges) that exceeds inflation by 3.5% p.a. over a 5 year measurement period.

The Stable Portfolio also aims to provide protection of the contributions you invest in this portfolio (i.e. the capital you invest including switches in from other channels) and in this way deals with your final payment risk.

Asset Allocation

The Stable Portfolio is an Insurer Guaranteed Fund. The Insurer will typically invest the underlying assets as follows:

Performance characteristics

The Insurer will smooth the investment returns earned on the underlying assets, usually over a period of 5 to 10 years. It does so by declaring a bonus. Smoothing means that the investment returns earned in good years are used to subsidize the investment return of poor years.

The bonus declared consists of two components, namely a vested portion (this part is guaranteed) and a non-vested portion. The non-vested bonuses may be removed in adverse market conditions at the discretion of the Insurer.

Stable Portfolio Accounts

Your investment in the Stable Portfolio consists of two accounts, namely your vested and non-vested account.

Vested Account

Your vested account is the build-up of the pension savings contributions you and the City pay, plus the vested bonus the Insurer declares, plus periodic transfers from the non-vested account, minus the investment management expenses and charges. The balance in your vested account is guaranteed.

Non-vested Account

The non-vested account consists of non-vested bonuses declared by the Insurer. The Insurer may remove these non-vested bonuses in adverse market conditions at its discretion.  This means that the balance in your non-vested account is not guaranteed.

At the end of each six months, a percentage of the balance in the non-vested account shall be transferred to the vested account. This percentage is at the discretion of the Insurer.

What capital protection is provided?

The Stable Portfolio aims to provide protection of the money you pay into this portfolio (i.e. your capital) and the vested bonuses the Insurer declares. It does not provide protection of the non-vested bonuses the Insurer declares, as the Insurer may remove these bonuses at its discretion (although this is unlikely to happen except under extremely bad investment conditions).

There are, however, three scenarios under which your capital (and the vested bonuses declared) is not protected, namely:

  • If investment markets are weak and you opt to switch out of the Stable Portfolio within 5 years from first investing in the Stable Portfolio

  • If investment markets are weak and the Fund opts to terminate the Stable portfolio without letting the Insurer pay the termination benefit in instalments. This is a highly unlikely scenario, but the risk remains.

  • If the Insurer that provides the protection of your capital is unable to meet this when the Fund calls on this guarantee. Again, this is a highly unlikely scenario, but there is this risk.  (The Insurer is regulated by the Financial Services Board, which monitors the financial strength of all the South African insurance companies and requires them to hold reserves at a specified level.)

Switching out of the Stable Portfolio

If you invested in the Stable Portfolio you may incur some financial loss in some circumstances, if you want to switch your money out of this portfolio into another channel. This includes switching it to a homeloan. Please note this does NOT apply if you are receiving a benefit payment as a consequence of leaving the Fund.

If you wish to switch out of the Stable Portfolio and you have been invested in it for fewer than 5 years, the amount you will receive is the lesser of:

  • The total balance of your vested and non-vested account; and

  • The market value of the underlying assets based on the actual investment return earned on your money (after deducting the cost of the guarantee, shareholder charges and the investment management fee.)

In effect this means that if the investment returns have been poor and you wish to switch out, you will be credited with the actual net investment performance rather than the smoothed return.

No switch penalty will be applied to a member account that has existed for 5 years or longer.  However, if investments were switched in to the Stable Portfolio at a date after you first invested in it, and the switch amount was significant – greater than 20% of the amount that you had invested in the Stable Portfolio on the preceding 31 December – the switch amount will be placed in a separate member account, and switch penalties may apply to this separate account in its first five years if you choose to switch out again.  The rules relating to switch penalties are highly complex, and you are strongly advised to ask before switching out, rather than relying on this summary.

Investment manager

The investment manager for the Stable Portfolio is Momentum.

Charges

The following charges apply to this portfolio:

  • Investment management and custody fees: The member pays the investment management and custody fees (the fees are deducted from the investment return credited to you, i.e. the bonuses declared by the Insurer).

  • Capital charge of 1% per annum: This is the cost of providing the guarantee.  This charge is deducted from the underlying assets before the bonuses are declared, so it also has the effect of reducing the net investment return credited to you.

Investment objective

The investment objective of the Money Market Portfolio is to perform in line with the published money market index.

Asset allocation

This portfolio will be 100% in cash and other instruments that have a term of up to 12 months. The average duration of the portfolio may not exceed 180 days.

Performance characteristics

This portfolio will give you a cash-like return. It important to understand that this portfolio does not provide a guarantee – it is possible that in extreme events that one of the banks in which the Fund invests your money might fail (default), in which case there could be a negative return from the Money Market Portfolio.

Risk constraints

The money is only invested with banks and institutions that have a very strong credit rating. The money is also split between various institutions so that you are not over-exposed to a particular bank or institution.

Investment manager

The current investment manager for the Money Market Portfolio is Prescient Investment Management and Investec Credit Opportunities.

Charges

You are credited with a net investment return each month – this means that investment management fees and other expenses, such as custody fees, have already been deducted.  The investment fees are very low compared to the Market and LEB Portfolios.

Investment objective

The investment objective of the Low Equity Balanced (LEB) Portfolio is to earn an investment return (after manager fees) that exceeds inflation by 3.5% p.a. over at least 5 years. It is important to note that this level of return is not guaranteed and will depend partly on market conditions.

Asset Allocation

The strategic asset allocation of the Portfolio is shown in the chart below:

Thus the portfolio has a 33% strategic allocation to equities and a 67% strategic allocation to bonds and cash.  This is much more conservative than the Market Portfolio.

The actual allocation of the portfolio will vary within pre-defined parameters around this strategic asset allocation. This means that the actual asset allocation will not always correspond exactly to the pie chart.  The trustees may also decide to make changes to the investment strategy from time to time – this could affect the asset allocation as well as the choice of investment firms to manage the portfolio.

Performance characteristics

This portfolio does not provide any performance guarantees or capital guarantees. However, the portfolio should produce consistent positive returns that are targeted to beat inflation over 3- to 5-year periods. It is possible that in any given month the return could be negative. However, the negative return is not likely to be material, and it is unlikely that there will be a material negative return over any 12-month period.

It is important to understand that whilst negative returns over a 12-month period are unlikely, they are not impossible. In summary, over periods of 3 to 5 years you can expect:

  • a low probability of capital losses, and

  • a high probability of returns above inflation.

    It will not protect your capital as well as the Money Market Portfolio, but it is expected to provide a better investment return than cash over 3 to 5 years.

Investment Managers

The investment managers for this portfolio are:

  • SA equities: Allan Gray Limited, Coronation Asset Management, Investec Asset Management; Afena Capital and ABAX

  • SA bonds: Prescient Investment Management , Investec Asset management and Future Growth Asset management

  • SA cash: Prescient Investment Management and Investec Credit Opportunities Fund

  • International equities: Brandes Investment Partners, Hosking & Co, Veritas Asset Management, Contrarius Investment Management and Walter Scott

  • International bonds: Colchester

Charges

You are credited with a net investment return each month – this means that investment management fees and other expenses, such as custody fees, have already been deducted.

The key feature of the Shari’ah Portfolio is that it adheres to the following Shari’ah principles:

  1. The ban on interest: Interest must not be charged or paid on any financial transaction, as interest is deemed unlawful by Shari’ah.

  2. The ban on financing certain economic sectors: Companies involved in the following activities are not Shari’ah compliant:

  • Conventional financial services;

  • Alcohol and tobacco;

  • Non-halaal food production or processing activities;

  • Entertainment (casinos, gambling and pornography);

  • Weapons and arms manufacturing.

    It is important to note that the investment restrictions listed above may result in Shari’ah compliant funds performing differently to funds with similar investment objectives which are not subject to these restrictions. In other words, the Shari’ah compliant funds may at times give better or worse investment returns than funds with a similar investment. This will happen during periods when the prohibited companies either do extremely well or extremely poorly.

Features of the portfolio

Appointed Multi-Manager

The Fund has appointed 27four Investment Managers (an authorised financial services provider) as the multi-manager responsible for the construction of the Fund’s Shari’ah Portfolio. All investments meet Shari’ah principles as interpreted and laid down by the 27four Shari’ah Supervisory Board. The investment process ensures adherence to Shari’ah principles which the 27four Shari’ah Supervisory Board monitors closely on a regular basis. The specific investment product that the Fund will invest in is the 27four Shari’ah Multi-Managed Balanced Fund.

 

Multi-Manager investment process

27four combines different asset managers for each asset class, each manager with a different set of skills. The portfolio is therefore diversified by investing in a combination of Shari’ah compliant equity fund managers locally and internationally, Sukuk (“Islamic bonds”) and direct physical exposure to gold bullion.

Investment objective

The Shari’ah Portfolio aims to deliver a real return of 4% (after deducting management expenses) in excess of SA price inflation over any rolling 5-year period. This investment return is not guaranteed and will depend on market returns and investment manager skill.

Performance characteristics

The assets of the 27four Shari’ah Multi-Managed Balanced Fund are invested in a mix of Shari’ah compliant shares (local and offshore) and local “Islamic bonds”. The Fund has a lower weighting to equities and a higher weighting to fixed income assets than the Fund’s Market Portfolio. This means that the Shari’ah Portfolio should provide a somewhat greater cushion against negative returns in the equity markets in the short term than the Fund’s Market Portfolio. However, over the long term it may not perform as well as the Fund’s Market Portfolio due to the fact that it has fewer assets invested in equities than the Market Portfolio.

This portfolio is exposed to the performance of markets, and the return you earn from this option over shorter periods may be positive or negative depending on market conditions.

Asset allocation

The 27four Shari’ah Multi-Managed Balanced Fund has a maximum equity allocation of 60% to shares (local and offshore) with the balance of assets invested in “Islamic bonds” and gold. The table below shows the asset allocation and the asset manager combination:

Asset Class

Fund Manager

Allocation

SA Equities

Old Mutual Albaraka Equity Fund

40.0%

Kagiso Islamic Equity Fund

27four Shari'ah Active Equity Fund

International Equities

Quantitative Management Associates

20.0%

Acadian Asset Management

Africa Equities

Lotus Capital

2.5%

SA  Sukuks

Standard Bank

35.0%

Macquarie

ABSA Bank

Gold

ABSA Newgold ETF

2.5%

Costs

Investment management fees and multi-manager fees: between 0.75% and 0.85px% p.a. excluding VAT. This depends on the underlying asset allocation.The member pays these fees, which are deducted from the investment return credited to you.

PENSION FUND RULE BOOK

The registered rules of the Fund contain everything you need to know about your Fund, its Governance, Management, Investments and Benefits. The Fund is bound by the Rules of the Fund. In the event of a dispute between any information provided and the Rules of the Fund, the rules will apply.

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