A rollercoaster is an apt metaphor for the experience investors have as they get close to retirement: strapped into an investment market with no control over its direction, unable to get out.

Some love the thrill of it, but others cannot wait for the ride to be over – and would get out now, if they could. At least a rollercoaster’s passengers end up back where they started. Investing in the sharemarket offers no such guarantee.

The investment industry has been working for some time now on how to provide investors nearing retirement, and those in the first few years of retirement, with an investment solution that provides a high enough return to ensure their capital lasts and that they meet their retirement investment objectives, but without the volatility generally associated with high- return investments.

“We still need to have more solutions for financial advisers to help retirees,” says Peter Chun, general manager of product and investments for Colonial First State. Chun says advisers need a “toolkit” of solutions that they can use to tailor the best solution for each client.

There’s a growing understanding that portfolios need to be made less volatile for retirees, but that doing so by shifting assets into defensive, lower-volatility and lower-growth assets, isn’t necessarily an ideal solution.

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“Returns are going to be too low – investors still need to take some risk,” Chun says. “But retirees have concerns, and advisers have concerns, about retiree risk appetite.”

Chun says the task is to give investors confidence to remain invested in the sorts of assets they are going to need to ensure they generate the returns necessary to ensure their capital lasts long enough, and provides a sufficient level of income in retirement.

There have been attempts to do this in the past, but they have not caught on in a big way.

Too expensive, too complex

“Protected products in the past have been too expensive and [too complex] and, more importantly, they do not suit the advice process,” Chun says.

“A lot of advice business models have a very open model and it’s all around portfolio construction and how do you solve for these kinds of needs?”

A response to these needs is to approach the issue from a risk-management perspective, and with this in mind CFS has introduced a range of risk-managed funds to the Australian market, in conjunction with the South African financial services company Sanlam Group.

The funds feature a risk management overlay, managed by the US-based group Milliman. An overlay approach means the asset allocation of an underlying portfolio can remain focused on growth assets, and investors retain at least a significant portion of the capital gain potential of those assets.

“It still gives you access to the good properties of growth [assets], but the focus is to take the sting out of a poor market environment,” says Wade Matterson, a principal and senior consultant with Milliman in Australia

It also recognises that behavioural finance is real, particularly a characteristic known as “loss aversion”, which says that investors feel the “pain” of losses more acutely then the “pleasure” of gains, and will often take counterproductive action, to avoid losses.

If an investment solution can be structured to remove some of the triggers of loss aversion, investors can be “encouraged to make better decisions”, Matterson says. He says it is an approach to risk management that has emerged from the institutional investment world.

This is an edited version of a feature article appearing in the September 2015 edition of Professional Planner.

Simon Hoyle is head of market insight for CoreData Research.
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