Long-term investing

Overview

People invest for the long term for different reasons. When you have time on your side, taking advantage of two

things can maximise your outcome:

• investing in a reputable fund that is managed to deliver maximum capital growth; and
• doing so in a tax-efficient manner.

The impact of compounding maximum capital growth in a tax-efficient manner over the long term is significant.

This edition illustrates how to pair the most appropriate growth-oriented multi-asset class fund with a suitable tax-efficient product to achieve two examples of long-term investment goals.

Why do you invest for the long term?

The most likely (and significant) reason people invest for the long term is to build up capital for their retirement, which could be multiple decades from now.

Those who are fortunate enough to have access to discretionary savings (in other words, savings in excess of what they are already committing to their retirement pot) may be investing for an additional long-term goal, such as a child’s education, towards having greater financial freedom later in life, or towards creating generational wealth.

Whatever significant long-term goal you aim to invest towards, it is worth remembering that you can achieve maximum capital growth tax-efficiently. Let’s start with how to maximise capital growth over the long term.

Maximising capital growth over the long term

When investing for a long-term goal, your single biggest aim is to achieve inflation-beating returns that will grow your real wealth over time. Inflation is the biggest risk to long-term investors as it steadily erodes purchasing power, meaning that the same amount of money will buy less in the future than it does today.

EQUITIES DELIVER COMPELLING REAL RETURNS OVER LONG PERIODS OF TIME

As the graph below shows, equities stand out as the asset class best positioned to combat inflation, thanks to its ability to generate real returns that far outpace other asset classes such as bonds and cash. Historically, based on data spanning back to 1929, South African equities have delivered 7.4% per annum (p.a.) real over the very long term, whereas local bonds returned less than 2% p.a. real over the same period. Cash has barely kept pace with inflation, yielding real returns of 0.2% p.a. over this extended time period.

Thus, equities are essential for those aiming to build a portfolio that outpaces inflation and creates substantial wealth. They offer long-term growth potential that few other asset classes can match. By prioritising equity exposure over long periods of time, investors position themselves to achieve meaningful, inflation-beating returns.

CONSIDER GROWTH-ORIENTED MULTI-ASSET CLASS FUNDS TO STAY THE COURSE

Long-term investors could consider funds fully invested in equities – the asset class that provides the highest expected return over time (as demonstrated earlier). However, being fully invested in equities (domestic or global equities or a combination) comes with higher short-term volatility. While the longer you remain invested in equities, the lower this variability becomes, most investors may prefer a less volatile experience that allows them to stay the course.

For example, Coronation’s growth-oriented multi-asset class funds aimed at retirement or discretionary savers – Coronation Balanced Plus and Coronation Market Plus – have delivered equity-like returns over the long term (past two decades) without exposing their investors to the volatility inherent in a pure equity fund (see table below).

STICK WITH REPUTABLE MANAGERS WITH LONG TRACK RECORDS AND AN INTEGRATED APPROACH TO PORTFOLIO CONSTRUCTION

Delivering track records like the aforementioned requires asset allocation across all geographies and asset classes through the cycle—a capability that very few managers have. This is because it requires an integrated approach anchored in a granular understanding of every single security’s risk and return dynamics and the ability to construct and manage a portfolio based on that deep knowledge and ongoing monitoring.

Good asset allocation also requires active decision-making, as has been required in response to the many unimaginable events of the last 15+ years (including 9/11, the Global Financial Crisis, negative interest rates, the Covid pandemic, Russia’s invasion of Ukraine, etc).

In the fractious world we live in, we are likely to see more of these events. Investors need to consider investing for the long term with good asset allocators who have demonstrable track records of taking bold and decisive action when required.

Achieving tax-efficiancy over the long-term: Two case studies

In this quest for tax-efficient investing over the long term, your options include retirement annuities (RAs), tax-free investments (TFIs), and endowments for higher-income individuals.

While each of these fulfils a different function in an investor’s overall portfolio (it’s not a case of one being better than the other), the remainder of this Corolab will focus on two case studies in which we discuss the most suitable combination of underlying investment fund (with which to maximise your capital growth) and product type (with which to achieve tax-efficiency) for the purposes of retirement investing or for another discretionary long-term goal.

CASE STUDY 1: INVESTING FOR RETIREMENT BY WAY OF A RETIREMENT ANNUITY

Maximising capital growth with Coronation Balanced Plus

If you are saving for retirement, we believe that Coronation Balanced Plus, our flagship pre-retirement fund, is the most suitable option for your retirement savings. The fund offers investors the highest exposure to growth assets and offshore exposure within Regulation 28 limits, allowing investors to maximise capital growth.

Coronation Balanced Plus has a 28-year track record of delivering inflation-beating returns ahead of its benchmark (the ASISA category average). Since its inception, the Fund has also managed to outperform the local equity market, doing so with significantly less exposure to equities.

This level of outperformance, compounded over time can add significantly to your investment outcome.

As is clear from the prior graph, an investment in the average high equity balanced fund more than 28 years ago would have grown your capital by 26 times (in nominal terms) as at the end of October 2024, whereas a similar investment in the Coronation Balanced Plus Fund, which has outperformed the category average by a seemingly small 1.6% p.a. after fees, would have grown your capital by more than 38 times over this same period.

Achieving tax efficiency with a Retirement Annuity

The Coronation Retirement Annuity Fund is a personal retirement account that enables you to save tax-efficiently for retirement if you are self-employed or with which to supplement your existing occupational retirement savings if you are employed.

Your investment in an RA must comply with Regulation 28 of the Pension Funds Act. Investing in the Coronation Balanced Plus Fund (as discussed before) is the simplest way to achieve that using Coronation’s best investment views.

One of an RA’s key advantages is that your contributions are tax-deductible (up to certain limits). The following example best illustrates the tax saving enabled by contributing towards an RA. Investor A earns a non-retirement funding income of R500 000 a year but doesn’t contribute to an RA. As a result, Investor A pays roughly R120 000 in tax on that amount of income. Now let’s assume Investor A did contribute the maximum allowable amount to an RA, which is 27.5% of R500 000 (or R137 500). This results in a tax saving of more than R40 000, which ultimately funds 32% of Investor A’s contributions for the year.

Reminder: Don’t disrupt the power of compounding tax-free growth

If you consider the other key benefit of an RA, which enables your investment returns to grow tax-free while you remain invested, the investment outcome becomes even more significant. But it’s crucial not to disrupt the power of investment growth that grows tax-free.

While the new two-pot retirement system offers investors the flexibility to access a portion of their RAs during emergencies, early withdrawals come with significant long-term financial consequences that could drastically reduce a member’s standard of living in retirement.

>Early withdrawals are taxed at a higher rate

Early withdrawals from the savings pot are taxed at a member’s marginal tax rate, meaning a portion of each withdrawal is lost to taxation. Members who wait until retirement (age 55 years or ideally later) to withdraw from their RA, benefit from preferential lump sum tax tables. By withdrawing early, you effectively forfeit this valuable tax advantage.

>Early withdrawals disrupt the powerful effects of long-term compounding

Compounding enables retirement savings to grow exponentially over time, as returns generate further returns. For instance, for every R1 withdrawn from a retirement fund 30 years before retirement, the future value of a member’s savings is reduced by around R6 in real terms, due to the opportunity cost of foregoing compounded growth. Even over shorter periods, the impact is still significant –withdrawals made just 10 years before retirement could result in an opportunity cost of R2 (in real terms) for every R1 withdrawn.

This serves as a powerful reminder that early withdrawals not only deplete the current balance but can ultimately jeopardise long-term financial security.

CASE STUDY 2: INVESTING FOR A LONG-TERM GOAL WITH DISCRETIONARY SAVINGS

Maximising capital growth with Coronation Market Plus

If you are investing for a long-term goal with discretionary savings, your options for achieving maximum capital growth are wide. Depending on the purpose of your investment, your investment fund doesn’t need to comply with Regulation 28 and could include anything from a domestic equity-only fund (such as Coronation Equity or Coronation Top 20) to a global fund available to South African investors.

We believe Coronation Market Plus offers a complete long-term solution for discretionary long-term savers. Since its inception in 2001, Coronation Market Plus has met the needs of aggressive investors aiming to build long-term capital outside their retirement portfolios. With the ability to invest more than 75% in equities (the regulatory limit under Regulation 28) and 45% offshore, Coronation Market Plus has delivered annualised returns well ahead of inflation and the average balanced fund. What is particularly pleasing is that, over this period, Coronation Market Plus has also managed to outperform the JSE All Share despite never being fully invested in equities. Index’s performance.

Achieving tax efficiency with a Tax-Free Investment

If you want to make your discretionary long-term investment work harder, you could consider housing your chosen underlying investment fund in a tax-free investment (TFI), such as the Coronation Tax-Free Investment account.

When you invest in a TFI, you don’t pay local tax on your investment returns—both while you’re invested and when your investment pays out. The taxes you save remain invested to grow, which can make a significant difference over the long term.

The following illustrative example highlights the long-term benefits of tax-free compounding in a fund such as Coronation Market Plus. Imagine that you invest the maximum annual amount (R36 000) in a tax-free investment for your child from birth. If you continue doing so, you will reach the lifetime limit of R500 000 before your child turns 14. The longer you decide to keep the money invested, the more the benefits of compounding and the greater the extent to which your tax-free fund outperforms the same taxable fund in real terms.

Our analysis, based on certain assumptions (as detailed in the graph above), shows that if you keep the money in the fund until your child turns 18, the value of the tax-free investment will be 22% greater than the equivalent taxable investment. By age 30, this difference widens to 42% and by age 65, the investment would be double the value of the same taxable investment.

These results show that by resisting the temptation to disinvest from the fund, the nest egg built up would keep your child in good stead by either financing tertiary education, buying a first home or ideally investing in their retirement, depending on when your child decides to disinvest.

This theoretical exercise also shows the incredible power of compounding over long periods. Investing R500 000 spread out over 14 years and then doing nothing for 41 years results in an investment worth R17.7 million in today’s money by age 65. That is enough to fund a monthly retirement income for life of more than R80 000, again in today’s money. Our hypothetical (very patient) tax-free investment beneficiary would, therefore, never have to contribute to retirement while working, effectively freeing up 10% to 15% of annual income that would typically have been required to fund retirement income if you start contributing in your early 20s.

You can also select to maximise your capital growth in international markets

Investors seeking to utilise their discretionary savings in a fund predominantly investing in offshore asset classes (Coronation Market Plus is limited to 45% offshore) can consider one of Coronation’s global long-term growth-oriented multi-asset funds.

The Coronation Global Optimum Growth Fund is an aggressive allocation fund suited to investors with a very long time horizon (10 years plus). Read more about this fund in our Corolab: Investing Offshore.

A higher-income option

High-income individuals who have already hit the investment ceiling in their TFI could consider an endowment as another tax-efficient investment option.

The appeal of endowments lies in the flat tax rates that apply to income and capital gains. Income is taxed at 30% (compared with a marginal individual tax rate that can be as high as 45%), while capital gains are taxed at 12% (compared with an effective rate of 18% for individuals in the highest income tax bracket). Investors’ underlying fund options are not restricted by any regulation. As such, you can choose to invest in any of our long-term growth-oriented funds.

Conclusion

The conclusion is as simple as it is compelling: Invest for your long-term goals in reputable growth-oriented multi-asset funds with long track records of delivering equity-like, inflation-beating returns.

Choosing to house your long-term investment in a multi-asset fund has the added benefit that Capital Gains Tax is deferred until you decide to divest, as active asset allocation adjustments are made on your behalf within the fund and, as such, do not trigger a capital gains event (as would be the case with a DIY portfolio).

Choosing a multi-asset fund such as Coronation Balanced Plus (for savers who need to adhere to retirement limits within the context of an RA) or Coronation Market Plus (for discretionary savers who can seek more flexibility in terms of equity exposure than a Regulation 28-compliant fund) are most likely to help you achieve the best outcomes while enabling you to stay the course.

When you pair these track records with a tax-efficient product, the power of compounding will most likely do extraordinary things for you.

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