While Reserve Banks around the world cut interest rates to revive their economies from a COVID-19 induced coma in recent months, retirement savers sheltering their hard-earned savings in cash-based instruments are hurting as rate cuts dent monthly yields.  

This is according to Maahir Jakoet, a Portfolio Manager at Old Mutual Investment Group’s Customised Solutions, who says that this unprecedented scenario is driving the demand for a new type of asset class that balances the risk of rate cuts with growth potential. “Not only has the stuttering economy held back the growth of their investment portfolios, now the historically low-interest rates are eating into the potential incomes of retirement savers,” says Jakoet. 

The SA Reserve Bank’s decision in March to maintain the repo rate of 3.5% will have added to their woes, says Jakoet. And their nerves won’t have been settled by the US Federal Reserve saying it isn’t planning to raise rates until at least 2023, meaning interest rates can be expected to stay low for longer.

He explains that in retirement, you would traditionally move into a more defensive fund that pays income monthly. “And these are typically linked to the prevailing interest rates, which fell considerably in 2020 and aren’t expected to climb dramatically any time soon.”

Jakoet says this could easily lead retirees to consider moving into riskier asset classes to preserve their income. “This is obviously not the ideal solution because of the extreme volatility in equity markets. 

“Moving into conventional equity or balanced funds would offer the potential for above-inflation growth but at considerable risk. A market correction like what we saw in March would certainly be devastating,” he says. 

In these circumstances, he suggests retirement investors consider selecting an income fund with exposure to Islamic notes, known as a sukuk, that balances risk with growth potential.

“Unlike bonds that indicate a debt obligation, a sukuk offers the holder ownership of a physical asset. Another way to look at a sukuk is to think of it as a share certificate in an unlisted joint venture, for example, wind or solar farm.

“While their steady returns make a bond a good analogy for a sukuk, they typically derive their performance from being a ‘type of alternative investment’, like physical infrastructure assets. Generally, this asset class offers retirement savers diversification from more volatile listed equities and are uncorrelated with traditional growth assets like property,” says Jakoet

And because sukuks are Shari’ah compliant, they are unlinked to the interest rate. “Sukuks are priced according to the value of the physical assets rather than an intangible credit rating. In other words, the sukuk will increase in value when the assets increase in value, whereas profits from bonds correspond to a fixed interest rate or credit rating.

“Moreover, they deliver inflation-beating returns over the long run if properly structured and properly managed,” says Jakoet.

Anyone deciding to move their assets into a fund with exposure to sukuks can do so with relative ease and minimal administrative costs. However, Jakoet says that any retirement fund decisions are best handled in collaboration with a financial advisor. 

“A regulation 28 shariah-compliant income fund is suitable for retirees and savers looking for risk-averse assets that can provide relative capital stability over time,” concludes Jakoet.


Presh JM Reporter

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