It is enlightening to see that you are only drawing 2.5% income from your Coronation living annuity. That in itself should provide some comfort that recovery of your capital is very possible.
Before getting down to the ‘nitty-gritty’ of your Coronation living annuity, I would like to just hover on two points on benchmarking if I may.
Firstly, one must understand that the most recent return on any investment has a profound impact on the historical returns over all periods. A solid five-year and 10-year annualized return can be thrown on its back instantly by a recent one-week disastrous return.
Secondly, care must be taken to measure the returns of an investment against the appropriate benchmark. It is not fair to measure the returns of a global equity fund against the S&P 500 benchmark. Global equity funds invest across the globe whereas the S&P 500 invests only in the top 500 US companies. This is just a comment, I am not implying that you have mismatched fund returns with benchmarks, it is just a mistake commonly made.
The most appropriate measurement is to compare a fund’s return to that of its peers in the same category as you rightly did.
Now on to your Coronation issue.
By Coronation’s own admittance, their funds have underperformed dismally over the past 18 months or so. Prior to that, their returns have been decent. If Coronation funds have been underperforming consistently over the past 10 years, they would not have a business and quite frankly, they have a serious business!
Some would say that their assets are bulked up by institutional investors who do not care. I would disagree. Institutional investors have investment committees and boards of trustees who are responsible to their members. It is also their responsibility to understand how and why a fund provides returns in a certain manner. It is also the responsibility of these groups (and any financial advisor who specializes in investments) to establish if and how the investment strategy has been adapted to counter the recent disappointing returns.
At this point, I also want to point out that no fund manager has the ability to provide the best returns consistently year in and year out. All the major fund managers have had their fair time in the sun by being in the top quartile of returns for some time. Equally so, those same fund managers have also been in the doldrums at the bottom of the pile for some periods. Quite often these extreme periods of performance switching from the top to bottom and vice versa follow each other. This typical see-saw effect is common within the investment environment. Coronation is no different and this is their time to be in the doldrums for now…
That is why it is so important to construct portfolios using uncorrelated fund managers, ones who achieve satisfactory results but at different times during economic and investment cycles.
It is also important to understand how investment decisions are made and how portfolios are put together by fund managers. Most fund managers have investment committees and / or investment councils. Within these there are sub-groups that research certain sectors of the global investment environment and different asset classes. An overseeing committee will create a house view that takes global macroeconomics into consideration.
One area they will have strong views on will be within the offshore equity space where the main drivers and strategic allocation will be driven by price and preference between developed and emerging markets. Some investment houses will use the committee’s specialist funds as building blocks to create multi-asset or global funds. Coronation adopts this approach. Other fund managers will leave the stock-picking choices up to their respective investment teams meaning that their different funds will not necessarily have the same global equities in their various funds if one drills down into each fund.
So what went wrong at Coronation?
Coronation’s woes started almost two years ago. Coronation has had a strong view on the potential growth of Chinese stocks for quite some time now. This view led to more exposure to emerging markets (China in particular) across all their funds than the average fund. The Chinese clampdown on legislation across various industries last year hurt Coronation’s Global Emerging Markets (GEM) fund. GEM is included in all of Coronation’s funds that hold offshore equities as part of their strategy.
At the beginning of 2022 GEM also had Russian exposure just short of 10% of the total fund value. Since the war between Russia and Ukraine GEM marked down the value of their Russian assets to zero. This does not mean that the assets are gone, Coronation just accounted for the worst potential scenario. These two major events meant a loss of almost 38% over the last year. A loss that washed through all their funds that hold offshore equities which includes their SA multi-asset funds.
I mentioned using uncorrelated funds when compiling an investment portfolio. Most fund managers, including Coronation, advise investors to limit their exposure to a maximum of 25% to a single fund manager for exactly the reason that you experienced.
You rightfully mentioned that you do not have the option to invest with other fund managers within your Coronation living annuity. The reason is that Coronation is not classified as an ‘open architecture’ platform like Ninety One, Allan Gray, Glacier, Momentum or any of the others where you can access multiple fund managers.
I can only assume that you went the Coronation living annuity route to save administration fees?
You now have the decision to make whether you stick with Coronation or move to a platform where you can access other managers. Coronation made a valid point that if you move you cement in your loss. I think this decision should be led by your view of China’s potential growth. If you believe that China is going to maintain its growth and that returns are going to be substantially higher than the developed market, then perhaps you should stick around with Coronation.
Just be mindful of the implications of multiple exposures of GEM across the various funds. If you do not buy the Chinese story, then perhaps you should move your living annuity.
You also mentioned that you can not split your living annuity, which is 100% correct.
You can however, with some providers, split your living annuity with a portion invested in a life annuity – and life annuities make much more sense once you age beyond 70…