SMOOTHED PERFORMANCE
LIFE FUND
AN EXPLANATORY GUIDE
WEALTH
CONTENTS
1 WHAT IS SMOOTHING AND WHAT ARE ITS BENEFITS? 4
2 WHICH ASSETS DOES THE SMOOTHED PERFORMANCE LIFE FUND INVEST IN? 6
3 HOW DOES THE GUARANTEE WORK? 7
4 WHAT HAPPENS IF INVESTMENT MARKETS FALL? 8
5 FEES, CHARGES AND TAXES 9
This guide explains how the Smoothed Performance Life Fund works. This guide covers the requirements of
Directive 147 issued by the Financial Services Board, which requires Old Mutual to make the official Principles
and Practices of Financial Management (PPFM) publicly available. As an addition to this requirement, we provide
investors with this client-friendly document that explains the contents of the official PPFM.
The Smoothed Performance Life Fund is different from market-linked investment funds that pass on the
returns earned on investments directly to investors. The Smoothed Performance Life Fund is a smoothed
bonus fund and Old Mutual is entitled to use discretion in the way the portfolio is managed. It is important
that you understand the principles applied when Old Mutual uses this discretion, as it directly impacts your
investment outcomes.
3
1. WHAT IS SMOOTHING AND WHAT ARE ITS BENEFITS?
Smoothing is the process of passing on investment returns earned on investment portfolios, which are exposed
to market fluctuations, on to investors in a way that is more predictable and stable, or smoothed. These smoothed
returns are referred to as bonuses. Investors benefit from the investment returns of the underlying investments
of the portfolio by means of the smoothed bonuses declared by the Board of Old Mutual.
The objective of smoothing is to protect investors against market volatility in the short term while ensuring that
the bonuses declared produce a broadly similar return to that of the portfolio’s underlying investments over the
long term (before any applicable taxes, charges and expenses).
An investor in the Smoothed Performance Life Fund has a smoothed fund value that is made up of their investments
into the portfolio (net of any fees, charges and withdrawals), as well as bonuses declared on the portfolio.
Bonuses are declared annually in arrears using a transparent, fully disclosed formula. The formula takes into
account inflation, the level of the portfolio’s Bonus Smoothing Reserve (BSR) as well as the economic outlook. Old
Mutual retains ultimate discretion in determining the bonuses declared. These bonuses are applied to investors’
smoothed fund values daily.
At the same time, the Smoothed Performance Life Fund invests in underlying investments that have market
values that rise and fall with investment returns.
The portfolio’s BSR represents the difference between the market value of the portfolio’s underlying investments
and the portfolio’s combined smoothed fund value.
The market value of the portfolio’s underlying investments and its smoothed fund value will typically move in
the following manner:
1600
Smoothing* Balanced Fund**
1400
1200
1000
800
600
400
200
0
2004
2008
2006
2009
2007
2002
2020
2003
2005
2024
2022
2023
2001
2010
2014
2018
2016
2019
2017
2012
2021
2013
2015
2011
*Absolute Growth Portfolio (AGP) Bonuses back-tested pre-April 2007.
**Source: Alexander Forbes Global Large Manager Watch, median fund return.
During periods of strong investment returns, the portfolio will declare bonuses that are relatively lower than the
investment returns earned on its underlying investments. The excess investment returns are set aside in the BSR
so that, during periods of relatively poor investment returns, this reserve can be used to declare a higher bonus
than the investment returns earned on the underlying investments. In this way, the BSR “absorbs” the ups and
downs of the market.
4
An investor who is saving for retirement may be faced with the risk that markets might be down precisely at the
time they need their money. This is known as investment timing risk. In a smoothed bonus fund investors share
this investment timing risk – with some investors receiving less than the value of the underlying investments
on retirement when markets have performed better than average, and other investors receiving more than the
underlying investment value after a period of below-average market performance. By pooling large numbers
of investors together, these groups of investors cross-subsidise each other and, in the process, remove much of
the investment timing risk, so that all investors are able to receive their smoothed fund value regardless of when
they leave.
The effect of smoothing is illustrated below:
BONUS SMOOTHING RESERVE (BSR)
Excess growth flows into BSR BSR used to fill the gap
created by market downturn
Fund Value
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nd
s pro
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onu
ed B
ed
al Sm ooth
Old Mutu
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John Mary I can
ala
retire
now as
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planned.
ica
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I choose I choose an
a typical Old Mutual Global Financial Crisis!
balanced Smoothed Thank
fund Bonus I have to keep working or goodness for
product lower my standard of living. smoothing!
2008
Start of working life and contributing towards retirement Planned date Post-
of retirement retirement
Smoothing thus benefits you by:
• Reducing your exposure to the extreme ups and downs typically associated with investing in market-linked
balanced funds in the short term
• Allowing you to remain invested in portfolios with higher growth asset allocations while achieving a smooth
progression of your investment over time
• Reducing the risk of you potentially making investment decisions (driven by the erratic emotions caused by
market volatility) that might have a negative impact on your investments
Please discuss the short-term impact of the current level of the BSR on future bonus expectations with your
financial planner.
5
2. WHICH ASSETS DOES THE SMOOTHED PERFORMANCE LIFE
FUND INVEST IN?
The underlying investments of the Smoothed Performance Life Fund include local and global equities, bonds,
money market instruments, property and alternative investments.
The long-term asset allocation for the Smoothed Performance Life Fund is shown below:
Global Alternatives
3.50%
Local Alternatives
7.00%
Local Equities
Property 37.50%
6.50%
Global Interest
Bearing
5.00%
Local Interest
Bearing
21.00%
African Equities Global Equities
1.00% 18.50%
This asset allocation has a significant portion allocated to growth assets in order to achieve inflation-beating
return targets overLocal
the long term (in excess ofGlobal
Equities 5 to 10 years). As such, the Smoothed
Equities Performance Life Fund
African Equities
asset allocation is in line with that of a
Local Interest-Bearing moderately aggressive balanced
Global Interest-Bearing fund. The investment
Property managers may
depart from the long-term asset allocation over
Local Alternatives the short
Global to medium term, based on their view of the markets
Alternatives
and the relative attractiveness of these asset classes.
Although the long-term asset allocation is not expected to change often, Old Mutual may adjust this if changes
occur in the regulatory, economic or investment environment.
6
3. HOW DOES THE GUARANTEE WORK?
The Smoothed Performance Life Fund gives you a guaranteed minimum fund value that is the same as the
amount(s) you invested, minus withdrawals, charges and taxes (where applicable).
This guarantee is applied to Defined Benefit Payments only. Defined Benefit Payments are as follows:
PRODUCT DEFINED BENEFIT PAYMENTS
Retirement Annuity Fund Retirement, ill-health retirement and death
Living Annuity Annuity income payments and death
Investment Plan (LIFE) Guaranteed Dates and death
Guarantee dates are set at every five years of the policy term. Guarantee dates also come into effect on contractual
recurring premium plans at the end of the premium-paying term. There is no guarantee date where the
premium-paying term is less than five years. Irregular payments – including additional transfers or switches into
the fund – that you invest less than two years before the guarantee dates, will only be guaranteed up to 80%.
On each guarantee date an amount equal to the excess (if any) of the guaranteed minimum fund value over
the actual smoothed fund value will be credited to the investment, i.e. if, on a guarantee date, the smoothed
fund value is below the guaranteed minimum fund value, the smoothed fund value will be “topped up” to
the guaranteed minimum level. This “top-up” happens whether the investor leaves on the guarantee date or
chooses to remain invested in the fund.
Investors who voluntarily choose to take their money out of the Smoothed Performance Life Fund via a withdrawal
or switch while the portfolio’s BSR is positive, will receive their smoothed fund value. However, should customers
choose to voluntarily withdraw while the portfolio’s BSR is negative, a Market Value Adjuster (MVA) will be applied
to their smoothed fund value. More detail on MVAs is available in the “Market Value Adjuster (MVA)” section.
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4. WHAT HAPPENS IF INVESTMENT MARKETS FALL?
ACTIONS THAT MAY BE TAKEN
If investment conditions are adverse (for example, if there is a significant fall in the value of the portfolio’s
investments), management actions may need to be taken by Old Mutual to ensure the ongoing sustainability
of the portfolio. The aim of these management actions is to restore the BSR to a level where reasonable future
bonuses can be declared without threatening the portfolio’s ongoing sustainability.
Management actions can include a combination of the following:
• Low bonuses may be declared.
• Negative bonuses may be declared in adverse market conditions, at the discretion of Old Mutual.
• The impact of any negative bonuses is limited to removing the non-guaranteed portion of your investment.
• An MVA will be applied to voluntary withdrawals, as described in the MVA section.
MARKET VALUE ADJUSTER (MVA)
After periods of poor investment returns, the market value of the portfolio’s underlying investments may fall
below the portfolio’s combined smoothed fund value and cause the portfolio’s BSR to become negative. During
such periods, the amount that investors receive on voluntary withdrawals1 will be lower than their smoothed
fund values. This reduction in an investor’s smoothed fund value is called a Market Value Adjuster (MVA). An
MVA is used to bring the portfolio’s smoothed fund value in line with the value of the portfolio’s underlying
investments.
The purpose of the MVA is to protect the interests of the investors remaining in the portfolio. If this adjustment
is not put in place and an investor voluntarily chooses to withdraw from the portfolio while the BSR is negative,
the value paid to this investor from the portfolio would be too high. The negative BSR would be left behind and
the investors that remain in the portfolio would need to recover this BSR using their prospective investment
returns. This would cause the investors that remain in the portfolio to receive future bonuses that are too low.
It is important to note the following:
• An MVA will not be applied to a Defined Benefit Payment. This means that investors can benefit from
receiving their full smoothed fund values when Defined Benefit Payments are made, regardless of market
conditions at the time.
• The adjustment to an investor’s smoothed fund value on a voluntary withdrawal (that is, the MVA) in
response to a negative BSR does not benefit Old Mutual’s shareholders. Therefore, it protects those investors
who remain invested in the portfolio by keeping the BSR from becoming excessively negative due to the
voluntary withdrawal.
Old Mutual reserves the right to use its discretion in the application of the bonus formula and MVAs.
1
oluntary withdrawals include S14 transfers, directive 135 transfers, change in fund choice out of the Smoothed Performance Life Fund, zero-interest
V
loans, part-withdrawals, etc.
8
5. FEES, CHARGES AND TAXES
Fees and charges are applied to the Smoothed Performance Life Fund in order to cover the costs of managing
the portfolio (investment management fee rates are as reflected in the Smoothed Performance Life Fund
performance fact sheets), as well as the capital charge that covers the cost of providing the guarantee. This
capital charge amounts to 0.85% per year for the Smoothed Performance Life Fund.
The Smoothed Performance Life Fund is closed to any new or additional investments. Investors who are
currently in this fund are ringfenced unless they wish to switch out to another investment option.
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FIND OUT MORE
This guide aims to provide a high-level explanation of how the Smoothed Performance Life Fund work. To
keep it as short as possible we have only outlined the most important information contained in Old Mutual’s
official Principles and Practices of Financial Management (PPFM) of Discretionary Participation Business. The
complete official PPFM is available on the Old Mutual website ([Link]/about/ppfm).
You can also obtain more information about the portfolio from your financial planner, or by using the contact
details below.
Old Mutual Wealth:
Tel: +27 (0)860 99 9199
Email: service@[Link]
Internet: [Link]
WEALTH
The information contained in this document is provided as general information and does not constitute advice or an offer by Old Mutual.
Old Mutual Wealth is an elite service offering brought to you by several licensed FSPs in the Old Mutual Group.
Old Mutual Life Assurance Company (SA) Limited is a licensed FSP and Life Insurer.