Grant Samuel Global Equity Advantage Fund

As we anticipate living longer, amid fears that our money will run out along the way, people approaching retirement are looking for that magic investment formula that offers growth but limits the risk of capital losses, thus allowing them to sleep at night without worrying every time the stockmarket tumbles.

The common stressful decision facing retirees is: should they keep funds in cash or other defensive assets, which limit risks but achieve low returns, or should they accept some risk to keep the nest egg growing to last through retirement.

The Grant Samuel Global Equity Advantage Fund reckons it has the answer.

What is it?

Essentially the fund puts most of its assets in the Grant Samuel Epoch Global Equity Shareholder Yield (Unhedged) Fund, managed by the New York-based Epoch Investment Partners.

The global equity yield fund invests in global companies that look after their shareholders; at the same time it uses exchange-traded and over-the-counter derivatives to implement a "volatility overlay" to provide a buffer against market downturns.

The overlay is implemented by the Sydney-based Triple3, an independent research and investment management firm that specialises in volatility.

How does it work?

The global equity yield fund focuses on what it calls "shareholder yield".

Investments are diversified and it says companies must demonstrate financial strength and be committed to paying strong dividends, buying back their own stock and reducing debt.

The more complicated part is the options overlay.

The equity bull run of recent years appears to be grinding to a halt.

By entering into options contracts that generally move in the opposite direction to the underlying fund, the overlay aims to smooth returns so that the overall value of the fund does not fall as far as it otherwise would.

When the market turns upward the fund can resume growth.

Smoothing the volatility means the fund will not benefit fully from the upside in rising markets but the compensation is that it reduces the risk of losing gains already clocked up.

Back-testing of this growth and options-overlay formula shows that since 2008 negative returns were reduced by 40% to 50% while 75% to 80% of the upside was maintained.

The aim of the fund is to capture 80% of any upturn in share prices and limit any downside to 60%.

It aims to provide quarterly income derived from two sources: the investment in the underlying fund and income from its options strategy.

How important is timing?

Volatility in markets and the order in which investment returns rise or fall can make a big difference to the capital base once retirees begin to draw on their savings.

If they experience positive returns in the first few years of retirement they will be better placed to ride out subsequent downturns.

But if returns in early retirement are negative, then proportionally more capital is required to fund living expenses.

This was the case for many retirees during the GFC when they found they were withdrawing from a diminishing capital base, which significantly reduces the possibility of recouping losses over time.

What does it cost?

The annual fee is 1.4% of the fund, compared with an average of 1.2% for an unprotected fund. Retail investors can invest in the fund through a licensed financial adviser.

Pros

Sharemarket volatility is likely to be with us for some time, with world economic growth slowing amid fears that too much debt is held by countries, companies and households.

Protecting the super you have accumulated at the start of your retirement is therefore more important now than when share prices are rising. Growth is desirable but so is avoidance of risk.

Cons

A slightly complicated structure. Some funds with options strategies charge high fees but these are reasonable. Nevertheless, I would never put all my money in one basket, this one included.

My call

If I were heading into retirement now and with markets even more volatile than they have been in recent months, I would consider it beneficial to have part of my super - but not all - in this type of fund, where there are partners with a track record of growth, as well as having a clever but not hugely expensive options strategy to smooth out the bumps.

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