Sanlam : Sequencing-of-returns risk

Smooth Bonus Funds are designed specifically to address this sequence-of-return risk and reduce the volatility of a client's investments. This is typically done through regular bonus declarations, designed to provide a smooth return to investors.

Smoothing does not reduce or increase the returns, but merely changes the timing of when investment returns are released. Many different smoothing formulae may apply, but essentially, during periods of strong investment performance, a portion of the underlying investment return is held back in reserve and is not declared as a bonus. This reserve is then used to declare higher bonuses during periods of lower return than would otherwise have been the case. Bonuses are never negative, avoiding any drawdowns on portfolios.

Smooth bonus funds may have significant differences, so when selecting a smooth bonus portfolio it is important to consider the following:

1. Financial strength of the insurer - any guarantee is only as good as the institution providing the guarantee.
2. Transparency around bonus formula and funding levels - publicly disclosed information allows investors to make more informed decisions.
3. Management philosophy of the portfolio - what is the quality, experience and track record of the manager?
4. Strength of the governance structure - a strong governance structure will ensure sound management of the portfolios.