A road trip to financial freedom

Best preservation fund in South Africa?

By Lizelle Steyn

27 August 2021

best preservation fund

Photo credit: Pixabay


A few months ago I wrote an article on whether to choose a preservation fund or retirement annuity (RA) when leaving your employer, followed by an RA comparison in the search for the best RA in South Africa. A preservation fund comparison seems like the logical next step. Currently, the number of preservation funds available for investors who prefer low-cost index trackers is smaller than that for RAs. But you do have some good choices if you’re looking for the best preservation fund in South Africa.

For this comparison, I’ve included the four main preservation fund providers that:

These are the results.

Preservation fund comparison

Allan Gray OutVest Sygnia 10x
Platform/ admin fee (incl VAT) 0.58% p.a. for amounts up to R1.5m and 0.23% on portion above R1.5m but less than R5m; 0.12% on portion above R5m About 1.5% up to R315 000; thereafter fixed at R4 725 p.a. and stays fixed until the total investment is worth more than R2 362 500. You’re then only charged about 0.2% of the value of your investment. 0% if you choose Sygnia underlying fund; 0.46% p/a for an external fund for amounts up to R2m and 0.23% on portion above R2m 1.035% for amounts up to R500 000; 0.92% on portion above R500 000 but less than R1m; 0.805% on portion above R1m but less than R5m; 0.575% on portion above R5m but less than R10m; 0.4025% on portion above R10m
Most popular Reg 28 (balanced) index fund Nedgroup Investments Core Diversified Fund OUTmoderate index fund Sygnia Skeleton Balanced 70 unit trust fund 10x High Equity Fund
Total Investment cost of above fund (incl VAT) 0.42% p.a. Sponsored by the all-in product fee above 0.46% p.a. 0.135% p.a.
Combined total platform + total fund fee (incl VAT) on above fund choice 1% p.a. for amounts up to R1.5m and 0.65% on portion above R1.5m but less than R5m; 0.54% on portion above R5m About 1.5% up to R315 000; thereafter fixed at R4 725 p.a. and stays fixed until the total investment is worth more than R2 362 500. You’re then only charged about 0.2% of the value of your investment. 0.46% p.a. 1.17% for amounts up to R500 000; 1.055% on portion above R500 000 but less than R1m; 0.94% on portion above R1m but less than R5m; 0.71% on portion above R5m but less than R10m; 0.5375% on portion above R10m
Getting under the hood: asset allocation of above fund Strategic asset allocation targets.

Combined growth assets (equity + property) target = 75%

Benchmarks itself against:
46% capped SWIX excl. REITs (10% cap) – local equity;
5% capped SA REIT Index (20% Cap) – local property;
8% ALBI – local nominal bonds;
5% CILI – local inflation-linked bonds;
6% SteFI Composite – local cash;
21.5% MSCI All Country Index – global equity;
2.5% FTSE EPRA/NAREIT Developed Index – global property;
2.5% Barclays Global Aggregate Bond Index – global nominal bonds;
2.5% Barclays Global ILB Index – global inflation-linked bonds;
1% Composite USD/GBP/EUR Libor – global cash
Strategic asset allocation targets that are re-assessed every few years.

Combined growth assets (equity + property) target = 80%

Benchmarks itself against:
48% S&P SA 50 (10% cap) – local equity;
8% S&P SA Composite Property Capped – local property;
8% S&P SA Sov Bond – local nominal bonds;
3% S&P SA Sov ILB– local inflation-linked bonds;
3% S&P SA Pref Share – local preference shares (act similarly to bonds);
1.5% SteFI Composite + 0.5% SABOR – local cash;
14.3% S&P Developed BMI – global developed market equity;
7.7% S&P Emerging BMI – global emerging market equity;
2% S&P Global Property 40 – global property;
4% S&P Global Developed Sov Bond – global bonds;
Tactical asset allocation around long-term strategic allocation targets.

Combined growth assets (equity + property) target = 70%

Benchmarks itself against:
48% SWIX – local equity;
13% ALBI – local bonds;
11% SteFI Call – local cash;
22% MSCI All Country – global equity;
4% Barclays Global Aggregate Bond – global bonds;
2% global cash
Strategic asset allocation targets.

Combined growth assets (equity + property) target = 72%

Benchmarks itself against:
50.0% 10X SA Equity Index (capped at 6% per share) – local equity;
5.7% FTSE/JSE GOVI – local bonds;
9.1% SteFI 3-Month – local cash;
5.0% 10X SA Property Index – local property;
17.8% MSCI World Index – global developed market equity;
4.2% MSCI Emerging Markets Index – global emerging market equity;
2.5% USD/ZAR exchange rate – global cash
When can we expect the above fund to outperform its peer average? When Naspers shares perform poorly (typical of capped Swix equity exposure);
When growth assets (equity + property) perform better than bonds and cash
When Naspers shares perform poorly;
When growth assets perform better than bonds and cash;
When emerging markets outperform developed markets
When Naspers shares perform well;
When local bonds and cash outperform local property;
When local nominal bonds outperform inflation-linked bonds
When Naspers shares perform poorly (typical of exposure to a local equity index that caps each share at 6% of equity index);
When local nominal bonds outperform inflation-linked bonds;
When emerging markets outperform developed markets
Size of fund range Few passive funds but large active range (Allan Gray + several external fund managers) Range of four OUTvest risk profiled funds Substantial passive and active range (Sygnia + many external fund managers) Own risk-profiled lifestage funds only
Service channels and quality Latecomer to social media, but excellent service across all other channels. Available across traditional channels like telephone as well as digital channels A Big improvement on email responses since a year ago. Also very quick to respond on Twitter Excellent response time and quality of interaction. Available across traditional channels like telephone as well as digital channels.

Source: Allan Gray | Nedgroup investments | FundsData | Outvest | Sygnia | 10X | gofreedom.co.za | August 2021

Find the fees confusing? Ask for the effective annual cost (EAC) breakdown

If you find the fund and platform/admin fees published online confusing, do yourself a favour and contact the financial service provider of your preservation fund directly. Even the fund fact sheet – also known as minimum disclosure document – often doesn’t contain all the fees you’ll be paying. Ask for a full effective annual cost (EAC) breakdown inclusive of VAT, specifically for the amount you’re preserving and the underlying fund you’re selecting.

The quote you receive in your inbox is the one you should be able to rely on. At time of writing, for amounts below R1 027 000, Sygnia with the Skeleton Balanced 70 unit trust fund had the lowest fees. But for amounts above R 1027 000 Outvest beats its competitors.

Attention to detail: If you're interested in the Skeleton Balanced 70 fund and prioritise low fees, ask for the unit trust fund (0.46%). The life pooled version of it has a charge of 0.71%, because it can invest in additional asset classes, which may improve returns.

Fees aside, which balanced index fund will outperform?

If only investing was as easy as choosing the product with the lowest fee. Unfortunately, it also involve active decisions, such as which asset class indices to invest in and across which geographies. (For a refresher on asset allocation read this.) With a preservation fund, the pension fund law forces you to diversify across asset classes. You may not invest more than 75% in equity (local and global combined) and not more than 30% globally (across all global asset classes combined). Fortunately, all four funds compared above already comply with this law (Regulation 28). They don’t invest in the same underlying indices, though.

Because of the differences, certain funds will do better than their competitors under certain circumstances.

For example, the Sygnia Skeleton Balanced 70 unit trust fund typically has a higher exposure to Naspers than the rest and can therefore be expected to do better than the rest when Naspers shoots the lights out. The opposite is also true. To manage the risk of such a large share like Naspers performing poorly, the other 3 funds have capped their exposure to any one share in their underlying local equity market indices.

Where global equity is concerned, the MSCI ACWI actually has a very small exposure to emerging market countries (less than 12%). The OutModerate Index Fund and the 10x High Equity Fund have more emerging market exposure than what they normally represent relative to developed markets, and will therefore do better than the other 2 funds in cycles where emerging markets outperform developed markets.

Importantly, the Outmoderate Index Fund has the highest exposure to growth assets (equity and property combined) across geographies – 80%. Because over the very long term (20 years or more) growth assets typically outperform bonds and cash, we can expect the strongest long-term before-fees performance from this fund. But with more volatility - ups and downs in market value - along the way. For small investment amounts this fund is more expensive than the other three, though, and one would need to weigh the advantage of having more growth assets against higher expected volatility and the drawback of a higher fee if you’re preserving less than R315 000. In terms of performance potential, the Nedgroup Investments Core Diversified Fund is not far behind the Outmoderate fund with a decent 75% exposure to growth assets.

The verdict: the best preservation fund in South Africa

Choosing the best preservation fund is about more than choosing the product provider and underlying fund with the lowest fees. Because a transfer to a preservation fund takes time and waiting for the money to arrive in your new account could become nerve wracking, choose a brand you trust and who will respond to your queries around the status of the transfer promptly. Fortunately, all 4 service providers discussed here have set themselves high service standards. You could pick any of them based on service.

By choosing to preserve your retirement savings, you’re already miles ahead of anyone who has decided to withdraw their savings pot and spend it. So, please don’t have sleepless nights about which one of the 4 is the best preservation fund in South Africa. I did the analysis around which fund should do better under which circumstances because I like getting ‘under the hood’ of things. But one can still be a good enough investor without this kind of analysis. Yes, the fund with the highest long-term strategic allocation to growth assets at the lowest fee has the best chance of being the winner. Provided you have more than 7 years left to retirement, to give your fund time to grow and recover from future market corrections, any of them should do a fine job of preserving your life savings.




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