Coronation p kempen - november 2012

Sustainable Income in Retirement

Peter Kempen9 November 2012

https://sites.google.com/a/senategroup.co.za/the-senate-group/

State of the retirement income market

278,000 living annuities Average size: R560,000 Average income rate: 7%

90%

…of the R27bn invested in compulsory annuities in 2011

were invested in living annuities

>50%

…of living annuitants under 70 draw an income above

7.5%Source: ASISA Living Annuity Statistics for calendar year 2011.

Potentially far-reaching policy interventions to make the post-retirement income market more sustainable

Technical discussion paper B:“Enabling a better income in retirement”

Key proposals

Increased automation in the retirement process

Increased longevity protection for most retirees

Reforming living annuities

Increased automation

Increased automation in the retirement process

Retirement funds must select a single default retirement income product

Retirees will be auto-enrolled into the default option

May opt out of default option, subject to taking advice

When opting out, they must choose a conventional life annuity or another product that meets certain criteria

Increased longevity protection


First R1.5m of capital available to purchase a retirement income to be invested in an income plan that provides some form of longevity protection

Simplicity the word – very little choice, transparency, only initial commission and only on initiation and first two switches

Suggested designs include conventional annuities, variable annuities and a default version of a RIT

When opting out, they must choose a conventional life annuity or another product that meets certain criteria


Source: National Treasury

Introduction of retirement income trust (RIT)

Modelled on CIS – transparent and well understood

Same tax treatment as living annuities

No investment choice to reduce fees, but may choose different underlying investment strategies

Age-dependent drawdown limits

Limited commission to intermediaries

Will be able to transfer from a RIT to a conventional annuity free of charge

Reform existing living annuities to make them consistent with RIT


Retirement income planning trade-offs

Inflation risk• Balance spending needs between 1st and 2nd halves of retirement

• Have enough exposure to growth assets

• Capital Plus has 60% risk budget specifically to assist with long horizon income drawdown programmes

Sequence-of-returns risk• Manage downside risks (Goldilocks approach to risk exposure required)

• Select more conservative drawdown rates when assets are expensive / outlook poor

• Adjust income drawdown in line with actual returns (spending rule approach)

Longevity risk• Most clients underestimate their life expectancy

• If you can afford advice, you are likely to live longer than average

• Hence the need for a 30-40 year planning horizon when retiring at 60-65

• You can only insure against this risk by buying a life annuity at the moment (but poorly priced because of low rates environment)

Retirees’ risks

Income sustainability: 7.5% initial drawdown rate

If you earn a net real return of…

… you can maintain purchasing power for

2% 9 years

3% 11 years

4% 12 years

5% 15 years

6% 20 years

7% 23 years

Source: Asisa Standard on Living Annuities. Assumes constant inflation-adjusted withdrawals.

Income sustainability: 5% initial drawdown rate

If you earn a net real return of…

… you can maintain purchasing power for

2% 19 years

3% 24 years

4% 34 years

5% 40+ years

6% 40+ years

7% 40+ years

Source: Asisa Standard on Living Annuities. Assumes constant inflation-adjusted withdrawals.

SAFEMAX• Highest sustainable withdrawal rate if you retired in the year when a 50:50 equity: bond

portfolio offered the worst 30 year future return

• In SA this was 1930, when your sustainable withdrawal rate was 3.86% (assuming zero fees!)

It’s all about the first ten years• 80% of variation in safe drawdown rates is explained by interplay between investment

return, drawdowns and inflation over the first decade of retirement

Individual circumstances matter• Significant opportunity for advice to add value…

More lessons from the literature / history

Shorter than average life expectancy

Using spending rules• Formally matching drawdown rate to return and inflation experience during the first ten

years of retirement adds another 1%…

• Downside: potentially more income variability than some clients can stomach

Assuming declining spending as client ages• US study shows 65-74 cohort spends 20% less & 75-84 cohort 40% less than 55-64 year

olds. If entirely voluntary (debatable), this justifies a 1%-2% increase in initial drawdown rate

• Only works if adequate provision made for late-life medical expenses

The difference three years make• If you delay retirement by 3 years, you can increase the sustainable drawdown rate by

around 20% without making further contributions

Meeting higher spending needs

Coronation Balanced Defensive Cautious investors requiring stable returns

Risk (Annualised Standard Deviation)

Exposure to Growth Assets

Avg 35%Max 40%Reg 28

Long-term Growth

Investment Objective

CoroBalanced

Defensive

CoroTop 20

3 Years →

Income & Growth(Multi-asset)

Immediate Income

Ret

urn

(An

nu

alis

ed

Re

turn

)

CoroStrategic Income

CoroCapital Plus

CoroBalanced

Plus

Conservative Moderate Aggressive

2/10 3/10 4/10 6/10 8/10

Risk Profile

• Aim to exceed cash + 3% over time

• Protected capital over 12 months 100% of the time

10.9%

4.1%9.9%

12.3%

17.2%

2.1%

9.3%

6.7%

9.3%

10.5%

5 Year Performance & Risk quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested. Growth Assets are defined as domestic/foreign equities, listed property & commodities ex gold.

19

Avg 15%Max 25%

(0% normal shares)Reg 28



100%

Ave

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Th

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ctu

ate

as v

alu

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chan

ge

• Aim to outperform CPI + 4% over medium term

• Protect Capital over 12 months

Balanced Defensive Fund

Coronation Balanced Defensive FundPerformance since launch

R176 373

R151 525

R153 289

Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested

R 100.000

R 105.000

R 110.000

R 115.000

R 120.000

R 125.000

R 130.000

R 135.000

R 140.000

R 145.000

R 150.000

R 155.000

R 160.000

R 165.000

R 170.000

R 175.000

R 180.000

R 185.000

Feb-0

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ar-

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Apr-

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May-0

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7Ju

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Aug-0

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Jan-0

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Jan-1

0Feb-1

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Apr-

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Jan-1

1Feb-1

1M

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11

Apr-

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May-1

1Ju

n-1

1Ju

l-11

Aug-1

1S

ep-1

1O

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1N

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Jan-1

2Feb-1

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Apr-

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May-1

2Ju

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Aug-1

2S

ep-1

2

Value of a R100,000 investment on 1 February 2007

Coro Balanced Defensive

Mean Prudential Low Equity

STEFI

Coronation Balanced Defensive Fund Positive returns over all 12-month periods


-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

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-08

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08

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ay-

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Jun

-09

Jul-

09

Au

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-09

Oct-

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b-1

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r-1

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Jun

-10

Jul-

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g-1

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ep

-10

Oct-

10

No

v-1

0D

ec-1

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n-1

1Fe

b-1

1M

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Ap

r-1

1M

ay-

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Jun

-11

Jul-

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Au

g-1

1S

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Oct-

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No

v-1

1D

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b-1

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r-1

2M

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Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Rolling 12 Month Returns & Standard Deviation

Coro Balanced Defensive Mean Prud Low Eq Coro Ann Std Dev Mean Ann Std Dev

Coronation Balanced Defensive Fund Consistent 1st quartile performance

1 Year 3 Year 5 Year Since launch

Ranking 10/66 3/53 1/40 2/35

Quartile 1st 1st 1st 1st

Returns 15.9% 12.4% 10.9% 10.7%

Category Average 13.0% 9.8% 7.6% 8.0%


Coronation Balanced Defensive Asset Allocation since launch

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

June

10

Sep

10

Dec

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

Jul 1

2

Aug

12

Sep

12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Int Fixed Income/Cash

SA Pref Shares/Other

SA IL Bonds

SA Corp Bonds

SA Gov Bonds

SA Cash

Real Estate

Int Equities

SA Equity

40% max exposure to growth assets

Growth Assets are defined as domestic/foreign equities (excl. Pref shares), listed property & commodities. Asset Allocation as at 30 September 2012

Coronation Balanced Defensive Portfolio positioning

Reg. 28 Compliant

Growth Assets are defined as domestic/foreign equities (excl. Pref shares), listed property & commodities. Asset Allocation as at 30 September 2012

Income Assets 67.6%

Growth Assets 32.4%

International Real Estate

Domestic Real Estate

Int Equity

SA Equity

0.9%

4.3%

18.7%

8.5%

SA Pref Shares & Other

Int. Cash / Bonds

SA IL Bonds

SA Cash

SA Corp Bonds

1.6%

5.0%

12.1%

14.4%

34.5%

Capital Plus Fund

Coronation Capital PlusPerformance since launch

Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested.

R455 736

R380 840

R240 660

R 50.000

R 100.000

R 150.000

R 200.000

R 250.000

R 300.000

R 350.000

R 400.000

R 450.000

R 500.000

Jun-0

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Jun-1

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Feb-1

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Jun-1

2A

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2

Value of R100,000 invested on 02 J uly 2001

Coronation Capital Plus

Mean of Domestic AA Pru Variable Equity

CPIX +4%

Coronation Capital PlusRolling 1 Year Returns

Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested.

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Jun

-02

Au

g-0

2O

ct-

02

De

c-0

2Fe

b-0

3A

pr-

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Jun

-03

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Jun

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Jun

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Au

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1A

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Jun

-11

Au

g-1

1O

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De

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1Fe

b-1

2A

pr-

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Jun

-12

Au

g-1

2

Rolling 12 month return since 02 J uly 2001

Coronation Capital Plus

Mean of Domestic AA Pru Variable Equity

CPIX +4%

Coronation Capital Plus FundConsistent 1st quartile performance

1 Year 3 Year 5 Year 10 Year Inception

Ranking 7/44 4/40 6/32 1/7 1/5

Quartile 1st 1st 1st 1st 1st

Returns 15.2% 11.6% 9.3% 14.3% 14.4%

Category Average 11.6% 8.6% 7.2% 10.3% 10.9%


Coronation Capital Plus FundBear Market Returns

Performance quoted from Morningstar as at 31 August 2012 for a lump sum investment with income distributions reinvested.

Jul 01 - Sept 01 Jun 02 to Apr 03 Mar 04 to Apr 04 Mar 05 to Apr 05 Nov 07 to Jan 08 Jun 08 to Mar 09 Apr 10 to Jun 10 May 11 to Sep 11-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

Cap Plus Bal Med Eqt mean ALSI Pru Var Equity Pru Low Equity

Coronation Capital Plus FundBull Market Returns

Performance quoted from Morningstar as at 31 August 2012 for a lump sum investment with income distributions reinvested.

Oct 01 to May 02 May 03 to Feb 04

May 04 to Feb 05

May 05 to Oct 07 Feb 08 to May 08

Apr 09 to Mar 10 July 10 to Apr 11 Oct 11 to Feb 12 Mar 12 to Aug 120.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

Cap Plus Bal Med Eqt mean ALSI Pru Var Equity Pru Low Equity

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun1

0

Sep

10

Dec

10

Mar

11

June

11

Sep

11

Dec

11

Mar

12

Jun

12

Jul 1

2

Aug

12

Sep

12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Int Cash/FI

SA Pref Shares & Other

SA IL Bonds

SA Corp Bonds

SA Gov Bonds

SA Cash

Real Estate

Int Equities

SA Equity

Coronation Capital PlusAsset Allocation History

Max exposure to growth assets reduced to 60%

Growth Assets are defined as domestic/foreign equities, listed property & commodities (excl Gold).Asset Allocation at as 30 September 2012.

Coronation Capital Plus Portfolio Positioning

Growth Assets are defined as domestic/foreign equities, listed property & commodities. As at 30 September 2012. *Including effect of foreign currency hedge against foreign assets.

International Real Estate

Domestic Real Estate

Int Equity

SA Equity

2.4%

3.7%

15.5%

32.5%

Int. Cash/FI*

SA Pref Shares/Other

SA Cash

SA Corp Bonds

SA IL Bonds

7.3%

5.9%

6.4%

15.6%

10.7%

Income Assets 45.9%

Growth Assets 54.1%

Philosophy guiding protection strategy

Deployed to protect, not to make money (i.e. like buying insurance without the benefit of a no-claims bonus....)

No automatic rollover or renewal (each transaction is evaluated separately before implementation)

Level at which you buy protection far more important than price of volatility(hence we prefer an active approach)

Aim to spread levels of protection as far as possible (in terms of strikes, terms and expiry dates)

Will not off-lay costs by assuming unlimited liabilities on the downside!! (See our experience during GFC....)

Protection strategies

Our experience around protection over the last 12 months

Buying at-the-money puts work best if the market trends strongly up or down

Given lacklustre market performance over past year (with no big sell-offs) insurance didn't really add to portfolio performance

But it did allow us to continue buying some of cyclical shares into weakness, knowing that we are protected in the event of a disaster hitting global growth

Cost of protection continued to decline as appetite for risk increased, hence some mark-to-market losses on volatility also experienced

Estimated cost was around 80-90 basis points on overall portfolio

Protection strategies

Actual experience in Capital Plus since inception

As at 30 April 2012 – includes 0.75% annual adviser/admin fee

Value of R1m invested 11 years ago given different real income rates

No income 3% 5% 7% 9%

Nominal Real Nominal Real Nominal Real Nominal Real Nominal Real

Money market fund 2,280,321 1,173,079 1,433,732 735,802 1,051,237 538,638 770,192 393,999 563,847 287,975

Coro Strategic Income 3,012,251 1,549,956 1,893,927 972,196 1,388,660 711,689 1,017,407 520,582 744,830 380,495

Coro Capital Plus 4,053,696 2,085,889 2,548,728 1,308,356 1,868,773 957,774 1,369,163 700,587 1,002,346 512,061

Change in income level between 2001 and April 2012 after adjustment for inflation

3% 5% 7% 9%

Initial income per R1m invested in 2001 30,000 50,000 70,000 90,000

Initial income as % of initial capital 3.0% 5.0% 7.0% 9.0%

Current income adjusted for inflation 58,212 97,021 135,829 174,637

Current income as % of nominal capital

Average money market fund 4.1% 9.2% 17.6% 31.0%

Coronation Strategic Income 3.1% 7.0% 13.4% 23.4%

Coronation Capital Plus 2.3% 5.2% 9.9% 17.4%

Questions?

Disclaimer

Coronation Asset Management is an Authorised Financial Service Provider.

The content of this presentation and any information provided may be of a general nature and may not be based on any analysis of the

investment objectives, financial situation or particular needs of the client. (as defined in the Financial Advisory Intermediary Services

Act) As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client

first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that

would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate

considering the client’s own objectives and particular needs.

Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith.

39

Thank you!

Coronation p kempen - november 2012

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Transcript of Coronation p kempen - november 2012