How to better understand investment reporting

Many people are saving for the future via their employer’s retirement fund or by investing in products like retirement annuities or unit trusts. The providers of these investment products will send out statements on a regular basis to show how your money has grown and will also provide other information about these investments. Some terms used in these statements or “fund fact sheets” can be unfamiliar and confusing. To help decode some of this jargon, here is an explanation of some of the more commonly used terms

How to better understand investment reporting

Fund Objective: Each fund should have an objective, which is the target return that it aims to achieve over time. These objectives can be absolute or relative. For instance, an absolute objective would be something like – the fund aims to achieve a return (growth) of 10 percent per annum. More often the objective is stated in relative terms, e.g., the Fund aims to achieve a return of Inflation plus 3 percent per annum. The reason for this is that inflation erodes the value of money and therefore any sound investment should aim to exceed inflation by a margin, the size of which will be linked to the level of investment risk taken Typically, this margin will be between 2 percent to 5 percent above inflation over time.

Economic performance around the world

REGION

GDP Growth rate

Inflation

Interest Rates

Botswana

-4.1% (Dec-20)

3.2% (Mar-21)

3.75% (Apr-21)

USA

0.4% (Mar-21)

2.6% (Mar-21)

0.25% (Apr-21)

Eurozone

-1.8% (Mar-21)

1.6% (Apr-21)

0.0% (Apr-21)

UK

-7.3% (Dec-20)

0.7% (Mar-21)

0.1% (Mar-21)

China

18.3% (Mar-21)

0.4% (Mar-21)

3.85% (Apr-21)

Fund Strategy: The fact sheet will explain the strategy to be used by the investment manager, such as an equity (shares) strategy, where the product will only invest in shares on registered stock markets such as the Botswana stock exchange.  The most commonly used strategy is referred to as a balanced strategy, where the fund manager invests in many asset classes, including local and foreign equity (shares); fixed income (bonds and cash) and perhaps property. This strategy is common because it balances risk and return and offers good diversification across the main asset classes, which are equity (shares); fixed income (bonds and cash) and property – locally and globally.

Fund Benchmark: The benchmark is a reference point that guides an investment manager when making investments. The key elements of a benchmark are: (1) the asset allocation – i.e., what asset classes the fund can invest in. This can be a single asset class such as equities (shares) or multiple asset classes such as used in a balanced mandate; and (2) what market the investment manager is allowed to invest in for each asset class. For instance, for local equity (shares), the Botswana Stock Exchange will be the market. This means that the investment manager may only select shares listed on that exchange.

Cumulative returns: The term “investment return” simply means the growth that has been achieved on your investment. For instance, a 10 percent return means that your investment has grown by 10 percent. Therefore, if you started with P1 000 you would have P1 100 – a growth of P100. The fact sheet will also use the term cumulative return which tells you how much the Fund has grown from inception. The fact sheet will often also tell you what the returns have been for different periods, such the last year (1 year); as well as the last 3 and 5 years.  Returns are quoted in annual terms. What this means by way of example is, a 3yr return of 10 percent per annum means that your investment has grown by average 10 percent each year for the past 3 years.

Risk Profile: The fact sheet will often indicate the product’s risk profile in a table which will show whether the fund is low risk; medium risk or high risk.  Low risk means that there is a lower chance that the returns of the fund will be volatile and also a lower chance that negative returns can be experienced.  A higher risk profile means that returns can be more volatile and there is a higher chance of negative returns from time to time.  However, high risk funds also compensate the investor with higher growth over time and therefore these types of funds often give the best growth over the medium to long-term; and are most suitable for investors who are investing for a long time.  Conversely, lower risk funds are best suited for investors with a shorter time horizon who cannot afford to experience negative returns, but this also means they will receive lower returns compared to the higher risk funds.

Fees and charges: The investment manager will charge fees for their services and there will also be other charges incurred in the operation of the product. These fees are usually expressed in percentage terms like the investment returns, for example an average fee range is in the region of 1 percent-2 percent per annum. What important is to choose a fund which has fees that are not unduly high, as this will reduce the growth potential of the fund because you will receive growth minus the fees as the net return on your invested contributions.

In addition to these above terms that you may see on your investment statement, if you are a member of a pension fund, you may also see the term Net Replacement Ratio being used. This ratio compares the amount expected to be saved up to your retirement date with your expected final salary just before retirement. In more detail:

Net Replacement Ratio (NRR): NRR provides an indication of the amount of pension income that a member should receive, expressed as a percentage of the last pensionable monthly salary they will be paid before retirement. This number, quoted as a percentage, is calculated based on the value of a member’s current retirement savings plus various key assumptions, which are not guaranteed.  By way of example, if a member has an NRR of 75 percent, it means that if that member is earning P10 000 per month at retirement, they should likely receive a monthly pension of P7 500, i.e. 75 percent of the P10 000 (final salary).

How have financial markets performed over the last 12 months to March 2021

1 Year Botswana Local shares (TR)

1 Year Botswana Local Bond Performance (Fleming Bond Index)

1 Year money market (BWP) (Overnight Call rate +2%)

1 Year MSCI ACWI (BWP)

1 Year MSCI Emerging Markets

1 Year change Botswana Pula vs US$

-9.42%

-0.05%

4.94%

46.56%

46.84%

8.95%

THE BOTSWANA RETIREMENT FUND COLUMN IS SPONSORED BY STRATEGIC WEALTH

What is Strategic Wealth?

Strategic Wealth is a Botswana retirement funds investment specialist.  The firm is 100% citizen and female owned and committed to improving retirement fund knowledge in Botswana.  Please send all comments or questions to: info@strategicwealth.info.

COMPETITION

Our reader competition remains suspended till further notice.

FORTHCOMING ATTRACTIONS

Our annual Trustee Training Workshops and Conference remain suspended till further notice.

DISCLAIMER:  While every effort is taken to ensure the accuracy of the information used in this column, Strategic Wealth accepts no liability for errors or omissions.  Information is provided for general educational purposes and is not to be treated as financial advice.  Investors should consult professional advisors before taking any action.  Not all statements necessarily reflect the views of Strategic Wealth.