Smoothed Bonus Funds: Investing in uncertain times
Global uncertainty has increased significantly over the past 20 years, affecting investment markets worldwide. Political events, wars, pandemics, and disruptions in trade and supply chains all contribute to market volatility. However, the need to invest for retirement, achieve growth above inflation, and maintain purchasing power remains unchanged.In these uncertain times, investors must rethink their strategies. Should we shift to safer assets like cash and bonds or wait for equity markets to stabilise? The answer is "No." Successful retirement investing requires time in the market rather than trying to time it. Despite the uncertainty, maintaining exposure to growth assets like equities is essential to beat inflation.
What does risk mean to you? Is it market volatility, not meeting a future financial goal, or saving money without growth? All three involve risk. For example, if an investment drops from N$100 to N$95, it may recover and grow over time—this is volatility. On the other hand, failing to meet a retirement savings goal may force lifestyle changes. Lastly, inflation erodes the value of money over time, making it harder to afford the same goods in the future. Therefore, one of the biggest risks is not taking on enough risk!
Rather than avoiding risk, it needs to be managed. This is where guaranteed or Smoothed Bonus Funds (SBFs) become attractive. These funds combine risky assets like equities with conservative ones like cash and bonds to create balanced portfolios. However, SBFs go further in protecting your investment.
What is a Smoothed Bonus Fund (SBF)?
SBFs are long-term investment portfolios designed to provide stable, inflation-beating returns while reducing the volatility of market-linked investments. These portfolios invest in both local and global markets and alternative assets such as private equity, infrastructure, and ESG-compliant investments.
How does an SBF work?
SBFs provide smooth returns by balancing growth and capital protection. They target returns of 2% to 6% above inflation. Excess returns flow into a Bonus Smoothing Reserve (BSR), which is used to top-up returns when markets perform poorly, ensuring consistent growth and protecting investments from significant losses. SBFs also offer capital protection, guaranteeing a minimum investment value, even in a market crash, depending on the selected guarantee level.
Who should invest in an SBF?
SBFs are ideal for individuals contributing to pension or provident funds who are uncomfortable with market volatility, those nearing retirement needing capital preservation, and retirees looking for stable income from a flexible annuity.
* Isaack Veii is the Head of Distribution and Retention, Corporate Segement, at Old Mutual Namibia.
** Opinion pieces and letters by the public do not necessarily reflect the opinion of the editorial team. The editors reserve the right to abridge original texts. All newspapers of Namibia Media Holdings adhere to the Code of Ethics for Namibian Media, a code established jointly with the Media Ombudsman.