Drawing Income From The Right Fund Is Vital
In our Quarterly Report for 2020, an article by Wessel Grobler and analytics by Hennie Botha, covered an extremely interesting point for income withdrawals inside our solutions. Some of the most frequent questions we are being asked during this time is coming from our clients drawing income from our solutions:
- “How did COVID-19 effect my income withdrawals for the future?”,
- “Should I amend how much I’m drawing?”,
- “Is my portfolio going to generate enough growth to keep me going after the effect of COVID-19?”.
By now COVID-19 is something we all are very familiar with. No one has been excluded from feeling the reality of the virus in some way or another. To some, income has been reduced, a job lost, maybe your business is just staying afloat, or perhaps you or your loved ones have tested positive for COVID-19. There are many new realities to which we find ourselves in today, emotionally, physically, financially and mentally. Although our job at Fairtree Invest specializes in numbers, seeming somewhat impersonal at times, our hearts are to steward our client’s finances well – and do so in excellence. In this article, we will show you how we have done just that, by answering the questions mentioned above.
Industry Problem
Which fund an investor is drawing an income from is extremely vital. An industry problem we are facing, is that most retiree’s portfolios are structured to draw monthly income from ‘Balanced Funds’. Balanced Funds can hold up to 75% in equity and we know that equity is for long-term investments. To be drawing short-term income out of long-term investments, in our opinion, is portfolio suicide.
At Fairtree Invest, we see ‘Balanced’ differently. We steer clear of this by placing our clients inside our ‘Bucket Approach’ portfolio structure. This allows us to safely draw income for our clients with little exposure to the equity markets, while segregating another portion of the portfolio to simultaneously achieve long term growth.
Live 2019/2020 Scenario Analysis Figures
We however, do not base our execution merely on our opinion and gut-feel. Let us compare three scenarios of local competitor balanced funds against our Fairtree Invest’s bucket approach.
Question: Which Portfolio do you want?
Situation: You have R1 million invested and are drawing a monthly income of R5,000.00 per month(6%). Two things will be influencing your R1 million invested:
1. The monthly return from the fund where the R1 million is invested
2. The monthly income you are drawing, from the fund where the R1 million is invested
- Drawing income from the Balanced Fund:
(These are live return figures, all figures are MorningStar generated, the Balanced Fund mentioned will remain anonymous):
2. Drawing income from the ASISA MA High:
(These are live return figures from the ASISA MA High category , all figures are MorningStar generated)
3. Drawing income from the Fairtree Bucket Approach:
30% Fairtree Flexible Income Fund and 70% Fairtree Worldwide Multi-Strategy Flexible Fund
(These are live return figures, all figures are MorningStar generated)
Daunting Tables?
These tables are a whole lot of numbers for more technical readers, but to people like myself, the bottom orange summaries helped my decision.
In Scenario 1 and 2, you are invested in a well-diversified balanced fund, but are withdrawing from a single unit price. These balanced funds have rather large exposures to the equity markets. As we know, equity markets are long -term investments. In Scenario 3, you have a combination of two funds, one for an income provision of 5 years, being the Fairtree Flexible Income Plus Prescient Fund and the other being the Fairtree Worldwide Multi-Strategy Flexible Prescient. Which is a well-diversified, unconstrained fund, to facilitate the need for capital growth.
Remember that both the monthly returns from the fund we invest in AND the monthly income we are taking, will determine how much money I have at the end of the year.
So for each portfolio, how much did my investment decrease by in the year, as I drew my monthly income:
Our bucket approach strategically divides our client portfolio’s into parts, each part has its unique function and purpose for the portfolio. A standard bucket approach structure is divided into three parts(depending on the amount of capital). This makes up one-part income, set up for 5 years, and two-parts growth. The two-parts growth are structured so that they have undisturbed investment time of 5 plus years. In other words, by not drawing monthly income from your growth assets- it allows it time to recover from market downturns and take part in market rallies.
Should clients restructure portfolios because of the market effects of COVID-19 to date?
Already we can see that although the Fairtree Worldwide Multi-Strategy Flexible Prescient was hit by COVID-19 in March with a -9.02% return for the month, in April it was up again 10.78%. These types of short-term return jumps have little overall impact to a 5 plus year investment timeline. ‘Returns’ are not the game here, ‘time and return’ is.
1 month inside of a minimum of a 60 month(5 year) time span, should not be investor’s focus and reason for wanting to change portfolio strategy. If we look at decision making as a percentage here, taking a bad market short-term event (COVID-19) and trying to make a long-term decision (Investment over a 5 year period)- that would be 1/60 or a 1.6667% reason to restructure the portfolio. I am no expert in probability by any means, however I would rather lean toward waiting to see what is going to happen in the other 98,3333% of time left in the 5 years.
As our bucket approach illustrates, our structures cater to protect our clients responsibly, but not fear market events like COVID-19. Time is on our side and this too shall pass.
…Because with us, it is all about the Journey – let us manage that investment journey.
– Kheara Kroggel & Wessel Grobler
Article Credits: Investopedia
