In the current market environment equity income will play a valuable role for retirees while investors need to look for lowly-correlated sources of return according to a panel.
Speaking at the 2022 Lonsec Symposium, Martin Currie portfolio manager Will Baylis said equities have an important role in retirement income.
“With a 4 per cent draw down rate you’re going to need a 7 to 8 per cent nominal return just to replace that drawdown each year. That’s very challenging. If you went highly defensive into bonds or term deposits at this juncture you are going to have very inadequate income.”
During periods of high levels of inflation, Baylis said, dividends performed well.
“They not only directly serve a role with generating income but in the high-inflation environment we’re in dividends are really important.”
Baylis said consternation about high equity markets really presents an opportunity to re-evaluate the value versus growth dynamic.
“Value could outperform growth by 40 per cent,” he said. “Typically, the gap between the price to earnings ratio of growth and value stocks on average is normally about two or three points. [It’s currently] showing a 19 point gap.”
Lonsec portfolio manager Deanne Baker said equities and bonds can become more correlated in a high-inflationary environment which meant having low-correlated sources of returns in portfolios becomes critically important.
“That could be the illiquidity premium found in private markets. Alternatives will play a more important role, as well as real assets.”
Baker also pointed to underinvestment in infrastructure assets that should enter a boom.
“Governments have their wallets open and are starting to spend quite big after a period of underinvestment in listed infrastructure,” she said. “Many infrastructure assets have cash flows that are tied to CPI so you get embedded inflation protection in those assets.”
Baker said advisers could re-visit their manager line-ups to find one that has more flexibility to deal with challenging environments.
Once in a generation event
In an earlier session, BlackRock head of global allocation investment Rick Rieder said for the first time in four decades markets have been dealt with the “rare event” of both equities and bonds underperforming and the trusted 60/40 portfolio allocation needed a re-think.
“It’s been 40 years since we’ve seen a dynamic where both global equity and bond markets performed poorly like this. We haven’t seen anything like this in a generation or so.”
Rieder said in 2019 and 2020 returns were positive for both bonds and equities, but in 2021 only stocks performed while bonds were lackadaisical.
“This year… it’s very rare that you have a bond and stock market coming under pressure simultaneously and it’s creating some significant challenges for investors in the US but also globally.”
