A Core-Active™ approach to retirement planning

There is an increasing awareness, scrutiny and regulation of costs in the investment industry. International trends show that low cost strategies are an effective tool to deal with this fee pressure and it is likely that such strategies will begin to play a bigger role in the South African unit trust industry. The challenge for investors and their advisors is how to incorporate these low cost portfolios into their existing investment strategies and still achieve the desired results.

Currently, a typical approach to implementing an investment strategy entails allocating assets to three or four actively managed balanced portfolios. This ensures diversification across fund managers and asset classes, and also ensures compliance with retirement fund regulation at a member level. On the whole, this approach has proven highly effective in meeting the objectives of investors. Furthermore, the active funds that have been well supported have produced good results, both in absolute and relative terms.

So how do we introduce low cost portfolios to reduce the overall costs to investors and still retain the active portfolios that have served us so well over the years? The Core-ActiveTM approach to financial planning entails combining a Core portfolio with existing actively managed balanced portfolios. We believe this provides the advantage of lower total expense ratios whilst retaining the potential for active manager out performance.

The Nedgroup Investments Core portfolios

The Nedgroup Investments Core portfolios aim to fulfil the need for simple, low-cost, multi-asset unit trust portfolios that can be easily incorporated into a financial planning process and blended with active multi-asset unit trust portfolios.

The range consists of two highly diversified portfolios that provide exposure to five domestic and five offshore asset classes (equity, property, bonds, inflation-linkers and cash). The strategic allocations to these asset classes are constructed to maximise the likelihood of meeting the portfolios’ objectives over their stated investment horizons. The range consists of:

Both portfolios comply with Regulation 28 of the Pension Funds Act and can be used for retirement funds, preservation funds, endowments and retirement and living annuities.

The certainty of saving costs

The cost associated with an investment portfolio is one of the key factors in determining its success over the long term. Costs can be determined before investing, and any savings in costs will effectively improve the net return to investors.

The annual management fee of the Core portfolios is 0.35% pa (excluding VAT). The Total Expense Ratio (TER) of the Nedgroup Investments Core Range is currently 0.5% pa (which includes VAT and the costs of offshore Exchange Traded Funds). This is nearly 1.2% pa less than the TER of the average active balanced portfolio. This saving in costs can have a significant impact on your investment return in the long run.

The table below summarises the reduction in TER for different Core-Active™ combinations:

From the table above we can see that by combining the Nedgroup Investments Core portfolios with a range of active portfolios, a material reduction in TER is possible. For example, a 40% allocation to the low cost Core portfolios, combined with a 60% allocation to active portfolios (e.g. four active balanced funds each with a 15% weighting) can reduce the overall strategy TER by approximately 0.5% per annum, which is a substantial saving.

The Core portfolios are in their fifth year of existence and have achieved sufficient scale to be efficiently managed. We believe that a Core-Active™ strategy is an effective way to reduce overall expenses and still retain the benefits of active management.

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The investment objective of the STANLIB Global Property Feeder Fund is to maximise long term total return, both capital and income growth.