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Finding certainty in uncertain markets

The growing appeal of guaranteed products.

In the current environment, many investors don’t know where they should be putting their money.

There is a great deal of uncertainty across the world and it is difficult to find opportunities that are attractive both in terms of their risk and potential return.

“Investors are very nervous,” says Roenica Tyson, investment product manager at Glacier by Sanlam.

“That’s understandable if you look at volatility in the market and political uncertainty around the world. But unfortunately it’s causing investors to focus on the short term, and make emotional decisions, almost ignoring their long-term investment strategy.”

The economic and political landscape in South Africa does make it very difficult to feel confident about future returns. At the same time, markets are in a period of sustained underperformance. The JSE has not beaten inflation for the last two years.

“What we’re seeing is a lot of people moving into cash and looking for bank deposit-type investments,” says Tyson. “They clearly want to have some certainty around their investment, especially around protecting their capital.”

This has been exacerbated by the current low return environment. Even investors in multi-asset funds that have become a popular way to reduce volatility are concerned about the growth that they have been receiving.

“Over the last couple of years cash has generally outperformed these funds, which has left many clients thinking that they would be better off with a bank fixed deposit or other investment that can provide a guaranteed return,” Tyson points out.

However, while cash may seem safe, it does come with its own risks. The first is that over time, the returns from cash do not offer a lot of protection against inflation, particularly after tax.

“For higher marginal tax payers, they will be paying away a lot of what they earn in interest as tax,” says Francis Marais, a senior research and investment analyst at Glacier. “If you add that to the effect inflation has on the purchasing power of their money, investors are really moving backwards.”

The other problem for investors is if they decide to take their money out of the market and move it into cash, how will they know when it is the right time to go back in to the market? Missing out on the start of any new bull market could be significant.

“If you miss that initial return, it can make a big difference to your long-term performance,” says Marais.

“Over the long term, the compounding effect could mean that you lose a lot of money.”

This creates a dilemma for investors. They may understand that it’s important to invest for the long term and stay true to their investment strategy, but it’s very difficult to do when there is so much uncertainty and the short-term risks seem high.

A potential solution to this problem is products that offer investors some level of guarantee while still providing exposure to market-related performance.

“The price that clients are willing to pay for certainty has certainly increased in the last few years,” Tyson says. “The amount of money going into guaranteed solutions has significantly increased as the volatility and uncertainty in South Africa has gone up.”

A key feature of these products is that they eliminate the chance of any loss. The investment capital is guaranteed.

At the same time, they allow clients to receive equity-type returns. These may also be enhanced, depending on the type of product.

An example that is currently open for investment is the Glacier Capital Enhancer. It is a five-year investment that is linked to the performance of the Euro Stoxx 50 and FTSE 100. It therefore gives local investors offshore exposure, but with returns guaranteed in rands so that currency risk is eliminated.

The investment offers 100% capital protection and a guaranteed return over the investment term – currently set at 78% (12.2% per annum) so long as the combined index is higher at the end of the five-year period than it was at the start of the period. If the return from the combined index is greater than 78%, investors will receive any upside beyond that level.

Tyson explains, “Currently we are making the Glacier Capital Enhancer available in a Sinking Fund Policy, providing investors with some further tax advantages and ensuring tax efficiency is optimised.

An important consideration for investors is that this is a five-year investment, so they should only invest long-term capital, and they will also not receive any dividends. Importantly, they are also exposed to credit risk, as the guarantee is offered by a third-party bank and if it defaults, that will impact their capital.

“Only leading global banks, with a long-term credit rating of at least A+ from Fitch are considered,” says Tyson.

Ultimately, however, these kinds of products offer a risk profile close to cash, but with the potential for equity market returns. And investors looking for some degree of certainty may find this attractive.

“They offer a good alternative,” says Marais. “If you are thinking of moving a portion of your assets into fixed interest investments, then this might be something worth considering instead.”

For more information, please speak to your financial advisor.

Brought to you by Glacier by Sanlam.

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“The investment offers 100% capital protection and a guaranteed return over the investment term – currently set at 78% (12.2% per annum) so long as the combined index is higher at the end of the five-year period than it was at the start of the period.”

It is thus a guaranteed return only if the 2 markets are higher after 5 years.
No return if at the same level?
Is the combined level of the 2 indices split 50/50?

Roenica Tyson, investment product manager at Glacier by Sanlam:

The index split is 70% to the Euro Stoxx 50 and 30% to the FTSE 100 price indices.

If the performance of this combined portfolio over the five-year term is positive, the enhanced return of 78% will apply. But if the portfolio ends at the same level or has a negative return, capital is protected and investors will receive their full initial investment amount.

End of comments.





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