The Glacier Invest Real Income Solutions: A practical comparison of an average medium equity portfolio and the 4% Real Income Solution

By Lehan Kruger, Portfolio Manager at Glacier Invest, 20 March 2023

The Glacier Invest Real Income and Real Growth Solutions have been built to focus on reducing the two most important risks that living annuity investors are facing today. The risk of outliving your capital (longevity risk) and the risk of eroding your retirement capital if you retire when, or just after, there is a market crash, accompanied by the risk of timing drawdowns (sequential risk) are very real issues that retirees face.

The solutions have been constructed and designed in such a way that they are able to increase consistency and the predictability of income for retirees. This is done by utilising a portfolio construction methodology that results in investment portfolios with asymmetric return profiles.

By focusing on asymmetry, outcomes can be managed in a more predictable fashion while providing for enhanced compound annual growth rates. The Real Income and Real Growth Solutions aim to protect retirement capital during market downturns, while also enhancing returns, by including alternative higher-return asset classes such as private equity and private debt in retail client portfolios.

They are designed to incorporate non-traditional investment opportunities such as hedge funds, smoothing techniques and alternative investments. The allocations to alternative asset classes not only provide greater diversification benefits but also enhance portfolio returns. This allows investors to be invested in portfolios aligned with their return objective, but at significantly lower levels of risk compared to traditional long-only asset classes.

Using this outcomes-based approach, potential living annuity investment portfolios can be categorised based on their volatility and drawdown profiles.

Illustration of the performance of an investment in an average medium equity portfolio

Based on their income needs, the client would have been invested in the SA Multi-Asset Medium Equity category, as this would provide the asset allocation that matches the risk they would theoretically need to take on in order to fund their income needs.

Source: Sanlam Investment Multi-Managers, Glacier Invest, December 2022

In the graph above, the solid blue line indicates the changing capital value of the client’s remaining living annuity.

• The green vertical bars indicate the level of nominal income the client would have received, assuming they drew 4% of the remaining capital value at the end of each year during retirement
• The yellow vertical bars indicate the level of real income (taking inflation into account) that the client would have received each year

As we can see, their capital base would have significantly reduced by the end of the period, and they would have had to cut back on their income towards the end.

What differentiates the Glacier Invest Real Income Solutions?

An asymmetric approach

The portfolio construction methodology and the wider range of uncorrelated assets included creates an asymmetric return profile for the portfolio. Asymmetry means that the portfolio is constructed to provide more protection against market downturns, but still captures most of the upside when markets rise. This asymmetry, therefore, results in higher compound annual growth rates and lower volatility, ensuring outcomes that are more consistent and reliable over the long term.

Diversification and return enhancement

The greater range of asset classes included in the solutions ensures greater diversification, as well as enhanced returns. Hedge funds bring diversification to portfolios, smoothing creates more income stability and a reduction in volatility, and alternative asset classes boost returns. When combined into one portfolio, the addition of hedge funds, smoothing techniques and alternatives will all promote lower drawdowns, less volatility, and a more consistent income journey.