By Cornel Basson, Product Manager at Glacier by Sanlam.
The world of investments and global markets can sometimes feel like a roller-coaster ride. You can never quite anticipate the dips and inclines. No wonder ordinary South African consumers – some of whom are among the most anxious, risk-averse investors – struggle with being fully at the mercy of market returns and prefer something a bit more certain.
Enlisting the services of a reputable financial adviser is the only way to ensure a successful outcome, but the merits of good financial advice and planning is a discussion for another day. The crux of the matter for most investors in these turbulent economic times is: when I invest, what products will guarantee that I won’t lose my money (at the very least), and at best, grow my investment beyond expectation?
Getting out what you put in
‘Certain clients want to get out at least what they put in,’ explains Cornel Basson, Product Manager at Glacier by Sanlam. ‘Cautious investors, who make up a large percentage of the investor population in South Africa, want to feel their money is completely secure. Moderate-cautious investors are satisfied to invest with a lower, yet some sort of guarantee. They have low to zero tolerance for losses.’
A considerable portion of discretionary funds (a lump sum of money that you wish to invest) in South Africa is sourced from the permitted third of a pension fund withdrawn tax-free on retirement or retrenchment. The need for security on these funds is high as they are often hard earned.
Ask the right questions
Cornel suggests a checklist of five key questions to consider when choosing a guaranteed or fixed-return investment product:
- What level of guarantee is offered within the investment? Does it provide full capital protection after all fees, or does it only offer a certain level of protection?
- Are the investment returns calculated in rand or another currency? You’d be surprised by the difference this makes in your pocket. If it isn’t calculated in rand, you could be exposed to currency exchange movements.
- Does the guarantee stay level throughout the term of the product or will it increase over time? The guarantee offered on our Sanlam Escalating funds increases over time if there’s any growth within the fund.
- How accessible is your money before the investment’s maturity date? What are the chances you will need the funds before the product’s term has expired? Most guaranteed investment products are five-year products. While we acknowledge that life happens, it’s best to stay invested for the full period to realise the full benefits of the product.
- Who is providing the guarantee? Young financial services and product providers often offer high guarantees in an attempt to attract and grow their client base. What is your level of comfort with a young company? How does it compare to one that’s established with a track record of, say, 50 years or more? Where guarantees are concerned, established brands count.
Guarantees come with risk
The Glacier Research team agrees with Cornel. In a global context of low returns, high volatility and uncertainty, guarantees have become critical and attractive, they say. But they caution against the inherent risks in guaranteed funds, summing them up as follows:
- Single counterparty risk – the risk of the underlying entity for the guarantee becoming insolvent. This may be a low-probability event but the risk does exist.
- Opportunities lost – while an investor is guaranteed to earn a fixed return over the predetermined period, they’re also guaranteed not to earn anything above the predetermined amount. This removes the opportunity to participate in markets where there are substantial returns, as experienced in the past.
- No access to your money – they agree that ‘locking funds’ is a good thing for a long-term savings plan but intermediaries and their clients need to make provision for emergency funds to reduce this risk.
It all comes back to the plan
The most critical question is always: as an ordinary consumer, are you qualified to make an informed decision about any investments? A reputable financial adviser is qualified, has experience and has exposure to the product offerings of numerous financial services companies. Such an adviser is best placed to help you make the best choices as part of your carefully constructed, diversified financial plan.
Glacier offers you a suite of guaranteed solutions to choose from:
- Glacier Capital Enhancer offers full capital protection, enhanced returns, uncapped upside and tax-efficiency. If you’re nervous about entering the market, you can get exposure to the growth potential of equities – without the volatility. To complement this, there is also the Glacier Return Enhancer which allows slightly more conservative investors to share in some of the upside offered by the Capital Enhancer, while securing a minimum return, irrespective of market conditions.
- Sanlam Fixed Return Policy reduces the anxiety you may have about portfolio fluctuations over time and the potential of not meeting your investment objective due to market volatility.
- Sanlam Fixed Investment Product offers capital protection in the form of a fixed return, combined with a regular income throughout the investment term.
- Sanlam Escalating funds – although not a product, but rather a fund selection within a wide product range at Glacier, these funds provide exposure to the market, with built-in protection and guaranteed minimum returns.