Inflation-beating returns are on offer

Is your retirement portfolio positioned for it?

If the last year has taught investors anything, it is the cost of ignoring risk assets when market circumstances change so dramatically. But with a period of rapid global economic growth expected this year, risk assets such as equities remain set to benefit. We believe that investors near or in retirement, specifically those who have de-risked their portfolios in recent years, need to ensure that their retirement savings are positioned to capture the long-term inflation-plus returns that are on offer, as they do not come through in a straight line.

Here’s what you need to consider.

A macroeconomic boom is underway

The stage has been set for a period of rapid global economic growth. The IMF expects global growth at 6% this year (up from their previous forecast of 5.2%), with growth in the US leading the way. Albeit off a low base, this global economic recovery is expected to continue in 2022 at a somewhat slower pace, but still above the long-term trend. This optimistic outlook is premised on the release of significant pent-up demand as economies start to reopen, further assisted by ongoing massive fiscal stimulus and very low interest rates.

In South Africa, we also expect a decent recovery, with the local economy expected to grow at 4% or more this year - the highest number in some time, but also off a very low base. Looking ahead, we however expect the South African economy to remain under pressure due to severe and ongoing systemic risks, although improved revenue collection by the South African Revenue Service and strong policy signals from National Treasury should see us moving in the right direction.

Growth assets are set to benefit

There’s no doubt that growth assets, including global and local equities, have had a good run since March 2020. With the global backdrop remaining favourable, we believe that both global and local equities still offer upside potential and we expect these asset classes to continue delivering inflation-beating returns in the next 3-5 years (as is clear from the table below).

But inflation-beating returns are finite

Income-drawing investors need reasonable exposure to growth assets to support long-term capital growth, and for that they need to capture inflation-beating returns when they are on offer. But it is important to know that inflation-beating returns are finite. There will be abundant years and lean years, and it’s important for a retirement portfolio to be positioned to capture those returns during the abundant years as is currently the case.

Retired investors may be concerned about taking on undue risk

Investors in or near retirement should seek funds that allow a meaningful portion of the overall portfolio to be invested in growth assets. But to be appropriate to sustain retirement income, the funds also need a strong focus on risk to reduce the likelihood of potential negative returns over shorter time periods. This is important because the investor will be drawing a regular income from the fund. 

At Coronation, we offer two funds that specifically cater for retired investors: The Coronation Balanced Defensive and Coronation Capital Plus funds. Both funds provide a balanced solution that include allocations to equities and global assets, but they also manage downside volatility in line with the needs of those in retirement.

Delivering on the targeted returns of these funds during the complexities of the pandemic last year was a challenge. When the markets sold off sharply in March, our deep proprietary research enabled us to conduct rapid analysis and engage in robust debates, ultimately leading to the conclusion that the market was pricing in the worst outcome. Understanding this gave us the conviction to buy global and domestic equities at depressed levels. This decision paid off handsomely across our fund range. In the case of the Balanced Defensive and Capital Plus funds, retirees were able to benefit from the strong recovery in equities through funds that are tailored to their needs.

To learn more about navigating the challenges of post-retirement investing and the benefits of investing in the Coronation Balanced Defensive and Capital Plus funds, you can read our Corolab Investment Guide here.

Coronation is an authorised financial services provider.