Life-staging and Core investments – reducing costs of retirement planning

Life-staging and Core investments – reducing costs of retirement planning

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Read comments from Jannie Leach, Head of Core Investments as he explains the role that life-staging and core investments can play in reducing the costs of retirement planning

How are Core (Passive) funds intended to work? 

The Nedgroup Investments Core range was launched in 2009 to fulfil the need for simple, low cost, multi-asset unit trust portfolios that can be easily incorporated into a retirement planning process. Up to that point most of the available passive type portfolios were exposed to single asset classes only and were therefore not suitable for retirement savings.

The Nedgroup Investments Core range consists of three Regulation 28 compliant balanced portfolios each suited for different stages of the investor’s retirement savings journey:

  1. Nedgroup Investments Core Accelerated Fund: An aggressive balanced portfolio that targets returns of inflation + 6% p.a. over rolling seven-year periods. The combined strategic equity and listed property allocation is 90%.
  2. Nedgroup Investments Core Diversified Fund: A traditional balanced portfolio that targets returns of inflation + 5% p.a. over rolling five-year periods. The combined strategic equity and listed property allocation is 75%.
  3. Nedgroup Investments Core Guarded Fund: A conservative balanced portfolio that targets returns of inflation + 3% p.a. over rolling three-year periods. The combined strategic equity and listed property allocation is 42%.

 What is the investment style associated with these funds?

The Nedgroup Investments Core range follows a rules-based investment approach. Rules-based investing is the umbrella term we use to describe traditional market cap passive investments, quantitative strategies such as smart beta and multi-asset passive balanced funds such as the Core Range. These portfolios are highly diversified and provide exposure to five domestic and five offshore asset classes (equity, property, bonds, inflation-linkers and cash) each following a pre-determined rules-based benchmark. The strategic allocations to these asset classes are constructed to maximise the likelihood of meeting the portfolios’ objectives over their stated investment horizons.

How can using Core investments (on their own) reduce costs?

The Total Investment Charges (TIC) of the Nedgroup Investments Core Range is currently is nearly 1% p.a. less than the TICs of the average active balanced portfolio. For example on LISP platform considered in the example in the first table the TIC of the Nedgroup Investments Core Diversified Fund is 0.47% compared to the combination of active balanced portfolios which was 1.39%. By including the Core range into this portfolio (equally weighted) would reduce the TIC in that example to 1.16% and the EAC to below 2%.

What is a life-staging component and how does it work?

Life-staging is typically offered to retirement fund investors to reduce the chance of them switching into conservative or cash portfolios after severe market drop and in so doing locking in the market losses. In a life-stage strategy an investor will typically be invested in an aggressive or traditional balanced fund while they are young and systematically moved to a more conservative balanced portfolio in the years prior to retirement. This is to reduce the risk of suffering a major drawdown close to retirement where the investor doesn’t have enough time for the markets to recover before they start withdrawing a pension.

These types of strategies are typically offered where investors don’t have personal financial advisors, for example institutional employer options on umbrella funds or Virtual advisors such as Nedgroup Investments Extraordinary Life™ which only covers limited aspects of financial planning such as retirement.

How can a life-staging component, in conjunction with Core funds, further reduce costs?

For investors such as young professionals that don’t require comprehensive financial advice the combination of low cost Core funds and life-staging through a virtual advisor can save them platform and advice fees. For these investors this can save them between 0.29% to 1.44% p.a. depending whether they use a LISP platform with or without a financial planner.

How was this innovative, cost-cutting strategy developed?

The Nedgroup Investments Extraordinary Life™ Virtual Advisor Platform which hosts the life-staged retirement strategy was developed in partnership with the Nedbank Digital Fast Lane and a number of leading global digital experts and service providers. Its low cost offering is made possible by using the Core funds and fully automating the on boarding and administration processes. The automated on boarding includes electronic forms, FICA straight from Home Affairs and electronic signatures.