Michael Elsworth, Executive Director at Lonsec, joins us to discuss retirement income strategies during volatile markets, including his investment philosophy, the benefits and risks of different retiree income strategies and the advantages of combining income streams during times of uncertainty.
10. Page 9
Our Philosophy and Process
We believe in…
• Diversified portfolio approach
across asset classes and
investment strategies
• Top-down & bottom-up analysis
combined with quantitative
stress testing
• Strong focus on risk
management. Investors have an
asymmetric risk tolerance, fear
losses more than gains
12. A framework for building Retirement portfolios
• Recognising two objectives in retirement: Growth & Income
• Focusing on managing risks specific to the retirement phase:
• market risk
• inflation risk
• longevity risk
• sequencing risk
• A diversified functional approach i.e. not skewed to one factor such as yield or capital
preservation
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13. Portfolio Building Blocks
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• A building block approach forms the basis of every portfolio we build
• Fundamental analysis combined with quantitative models tested through a range of market conditions
Fundamental bottom-up analysis
Alpha
Growth
Beta
Yield
Risk
Control
Risk
Control
Accumulation Portfolios
Retirement Portfolios
14. Retirement Portfolios
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Objectives based
• Generate sustainable level of income, not outperform an index
• Management of drawdowns more critical
Certainty
• Retirees crave certainty
• Evidence that retirees are self-insuring against longevity risk
Different to Accumulation Portfolios
• Retirement portfolios need to be managed differently to accumulation portfolios
• Managed to mitigate different risks - income level risk, inflation risk, income volatility risk
15. Portfolio Construction
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Advice Is Key
Age Pension
Retirement Products
Account Based
Pension
Discretionary
Spending
Essential
Spending
• Australian Equities
• Global Equities
• Fixed Income
• Property
• Alternatives
• Cash
Account Based
Pension
Retirement
Products
Age
Pension
16. Retirement Products as part of a Portfolio
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No Allocation
30% Funded from
Defensive Assets
30% Funded Pro-Rata
Australian Equities 25% 25% 17.5%
Global Equities 25% 25% 17.5%
Property & Infra 10% 10% 7%
Fixed Interest 35% 5% 24.5%
Cash 5% 5% 3.5%
RETIREMENT PRODUCT 0% 30% 30%
Total PORTFOLIO 100% 100% 100%
17.
18.
19. Future Safe
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• Protection
• Growth
ASX 200 Accumulation
MSCI World Unhedged
• Income
• Flexibility
–10% floor
–5% floor
0% floor Fixed Rate
Cap:
Max. Gain
Floor:
Max. Loss
Source: Allianz Retire+
20. Risk Mitigation
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Sequencing risk – income streams can be severely impacted
by the timing of negative investment returns, particularly early
in retirement.
Longevity risk – increasingly important as life expectancies
have increased.
Market risk – Investors will need to take on market risk to maximise chances of meeting
long-term investment goals.
Inflation risk – the purchasing power of income streams can be eroded over the longer term
by inflation.
Interest rate risk – particularly relevant if retirees are using term deposits.
21. Advantages
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Guaranteed Payments
Annuities provide a guaranteed payment, paid over an investor’s lifetime.
Annuity payments are contractual obligations of life insurance companies. Capital is pooled in
statutory funds and monitored by APRA.
Downside Protection
Protect against equity market volatility when you need it.
Flexibility
Investors can select inflation indexed annuities which preserve income stream purchasing power.
Choice of underlying markets for Future Safe.
Enhanced liquidity with products offering capital withdrawal periods.
Guaranteed death benefits for beneficiaries.
22. Disadvantages
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Opportunity cost – retirees forgo the opportunity to potentially earn better returns in the
future.
Liquidity risk – capital is not always able to be accessed, though new features provide
greater flexibility but involve trade-offs.
Credit risk – annuitants are exposed to the creditworthiness of the statutory fund of the
insurer. The capital adequacy of insurance companies is monitored by APRA.
Transparency - fees may be quoted as an explicit cost in the case of annuities.
23. Thank You
Michael Elsworth
M +61 407 295 901
michael.elsworth@lonsec.com.au
Level 7
90 Collins Street
Melbourne VIC 3000
lonsecresearch.com.au