This is the second part of our study exploring the return prospects of the key local asset classes – SA Equity, Bonds and Cash – both individually, and combined within a balanced portfolio. In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. In Part 2 we examine the outlook for SA Bonds and Cash, and the likely impact on balanced portfolio returns.

In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Yet investors have done much better in recent years. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. This will make it even more important to follow a consistent and adequate savings strategy, and to keep a watchful eye on fees, to prevent the retirement industry pocketing an even larger share of returns. In Part 1 of this two-part study we explore the outlook for SA Equity.

The Occupy Wall Street movement has been criticized for its lack of agenda and failure to articulate clear grievances. Simply protesting against inequality is not enough – that has been around since the Middle Ages. What is required is an understanding that investment banks are simply another player in a zero sum game, namely the global bun fight over finite investment returns. And that the rules are unfairly skewed in its favour, resulting in an inordinate transfer of wealth from the many to the few. That is what we should protest against, this grand scale pilfering of our retirement savings.

Around the world, regulators and commentators are grappling with the same issue: finding the most pragmatic and effective way to fund workers’ retirement. Their suggestions, for the most part are simple, obvious and just plain common-sense. So much so, in fact, that it begs the question why they have not already been implemented. The short answer is that it is not in the retirement industry’s interest to do so. Fortunately, South African retirement investors do have an alternative: the 10X Funds (Umbrella, Preservation and RA) already incorporate these suggestions.

The shift to defined contributions retirement funds has served employers and providers, but not investors. But expecting the financially illiterate to secure their own pension was a bad idea from the start, founded on hope and expediency rather than rational belief. That foundation has long since collapsed under the weight of instant gratification, procrastination, ignorance, deception and greed. The past damage cannot be undone, but the system can be fixed, to give young savers a fair shot at a decent retirement.

Save 15% for 40 years to secure your retirement success, or so the standard industry mantra. It works well as a sound bite, but how well does it work in real life? Based on investment returns over the past 110 years, not so well. Other factors come into play, and unless these align favorably, the probability of achieving a ‘decent’ retirement is unacceptably low. Couples, in particular, can expect a high probability of success only once the contribution rate increases to 20% or the investment term lengthens to 45 years. Both possibilities seem remote, throwing into question are our accepted expectation of a predetermined retirement date.

The active versus passive debate has longed ceased to be a debate; study after study confirms that the average investor will fare better with an index rather than an actively-managed fund. The latest SPIVA Scorecards (Mid-Year 2011) published by S&P Indices are no exception. Active fund managers still have an important role to play in financial markets; but it is not a role they should expect to play with the pension money of rational investors.

The high churn rate in the unit trust industry serves the industry and financial intermediaries but hurts investors who are encouraged to replace their bets on last season’s winner. David F. Swenson, Chief Investment Officer of Yale University, writing in a New York Times op-ed contribution, sees a way out of this value-destroying model. Most of his comments are highly relevant to the South African market.

In case you missed FinWeek’s cover story on The Death of Retirement this week (24 May 2011) here is a brief summary (10X provided significant input). The overall theme is that it is getting harder for people to accumulate adequate savings to maintain their living standard in retirement. This is an alarming but not surprising conclusion as historic failure rates are already very high.

Nominal return projections that exclude the impact of costs and inflation can create an illusionary sense of future wealth. But what you see is not what you get – far from it!