With interest rates at record lows, traditional asset allocation approaches of diversifying into lower risk investments to manage risk may no longer be appropriate for income-oriented investors in or approaching drawdown mode. This finding comes from the latest Adviser whitepaper by BetaShares, a leading exchange traded fund manager, titled: ‘The Case for Managed Risk
Investments.’
Investors are now able to access managed risk equity investments to improve their risk-return trade off, in comparison to traditional allocations to cash and bonds.
As part of the research conducted by BetaShares, Chief Economist David Bassanese said managed risk equity investments are especially important as investors in or near retirement face the prospect of running down their investment capital to fund living expenses.
“This prospect is a growing reality for Australians, due to rising life expectancy and lower returns on safer assets than in previous years. Cash, bonds and other defensive assets are delivering low returns. This is giving rise to ‘longevity risk’ or the risk of outliving your retirement nest-egg”, he said.
Bassanese says that traditional asset allocation gives rise to two limitations. Firstly, by maintaining a relatively fixed asset allocation, whatever downside portfolio protection is afforded when equity markets decline is similar to the upside returns forgone when equity markets rebound.
Secondly, given today’s low level of global inflation and very low global bond yields, investors need to be mindful of the potential downside risks to bond returns in the coming years.
“Volatility need not be a large concern for long-term investors who don’t need to access their retirement savings for several years, but for those in or approaching retirement this volatility matters greatly as it leaves them vulnerable to hard-to-recover-from equity market slumps early in their retirement through ‘sequencing risk’.
“The trade-off between investing safely and preserving one’s investment nest-egg versus taking on more risk in the search for higher returns is becoming much more acute. New challenges require new approaches.”
BetaShares released a series of Managed Risk exchange traded investment products to address these challenges. The products are designed to provide the exposure to the equity markets needed for achieving adequate investment returns in today’s low return environment, while also reducing risk.
The Managed Risk series of funds (comprising the BetaShares Australian Dividend Harvester Fund (managed fund) (HVST), the BetaShares Managed Risk Australian Share Fund (managed fund) (AUST) and the BetaShares Managed Risk Global Share Fund (managed fund) (WRLD), have achieved their objectives since their respective launches, in all cases delivering equity exposure with approximately 30- 50% of the volatility of the sharemarket. The Series has experienced significant demand from financial advisors and self directed investors, with over $250 million of net inflows into the Funds.
Access the full whitepaper here; listen to David Bassanese explain Managed Risk in a webinar.
