Older Australians and their financial advisers need to reconsider the traditional building blocks of retirement portfolios to avoid people running out of money in retirement, according to global asset manager Legg Mason.
Speaking today at Legg Mason’s 2015 Retirement Income Symposium, Reece Birtles, Chief Investment Officer for Legg Mason-owned asset manager Martin Currie Australia, said too many older Australians faced being caught short by sticking to limited asset classes post retirement (term deposits, annuities) or ‘balanced’ funds with equities exposure that do not prioritise income returns.
According to recent industry data (note 1), the vast majority of the assets of Australian retirees are rolled into account-based (allocated) pensions products (92%), term annuities (6%), life annuities (1%) and TAPs (a legacy product, 1%). The majority of underlying investments for these products are cash and fixed income (roughly 70%) and mainstream Australian shares (roughly 30%).
Mr Birtles said retirees need to start looking beyond any single asset class to meet their retirement income needs, arguing a multi asset approach to retiree income delivers a more consistent and predictable outcome.
“Retirees rarely take into account the income risk inherent in investing in a single asset class,” Mr Birtles said. “For example, many retirees considered term deposits and annuities a reliable option for protecting their capital, but these products have suffered significant reduction in income over the past seven years that dwarf any potential loss from investing in equities.”
Instead of taking an approach based solely on a single asset class, retirees should consider balancing their asset allocation between three building blocks – equity income, real assets and fixed income – to ensure adequate capital preservation, income generation and inflation protection,” Mr Birtles said.
He said fixed income provides low capital volatility; real assets – such as AREITs and Infrastructure – offer income protection; and equities delivers significant upside potential for income growth.
“By using dynamic asset allocation across these asset classes, retirees can receive income that preserves their capital by providing long term growth in income and high yields relative to more traditional retiree asset classes such as term deposit.”
Meeting the longevity risk challenge
Legg Mason’s unique retirement income solution, the Legg Mason Multi Asset Retirement Income Trust (MARIT) was one of the first investment solutions available to individual Australians which is managed from a retiree (ie decumulation), rather than an accumulation, perspective. The fund invests in underlying strategies built to prioritise income returns from a range of asset classes.
Mr Birtles cited international equities as an example of where this different perspective becomes important. Global equities are seen as a core holding across most balanced funds, and while they provide diversification across markets, they are historically low yielding – making them the wrong type of growth asset for a retiree.
“For the retiree, this approach provides assurance that relative and absolute expected yields are actively monitored to maximise retirement income over the medium and long term,” he said.
Mr Birtles said it was important that both retirees and the investment industry focused on this mix of asset classes in order to create more robust and sustainable portfolios that can survive persistently low rates.
“What is required is a new way of thinking about the way we build investment products to suit retiree needs,” he said. “A focus on generating sustainable income growth through a multi asset approach will better meet the longevity risk challenge that all baby boomer retirees face.”
Note 1 – Source: Oliver Wyman
