Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 241

The role of multi-asset funds in retirement

In preparing for retirement, the investor journey used to be simple. Individuals would focus on growing their superannuation accounts, and as retirement approached, advisers encouraged them to switch systematically from risky assets to less risky assets, say, from equities to bonds. At retirement, they would focus more on capital preservation and often hold healthy levels of cash, term deposits or perhaps annuities.

But the investor journey has changed. People are living longer and interest rates are low. People may need to generate growth in their superannuation for longer, not just in the period up to retirement. Multi-asset funds could play a role in helping investors grow their pension pots both before and after retirement. They can offer the potential for more consistent returns than single growth asset classes, such as equities. This is relevant whether an investor is following a traditional shift from risky to less risky assets or other ways to construct a portfolio that supports their specific needs in retirement.

Different types of multi-asset funds for post-retirement

Many different types of strategies might be labelled as multi-asset, with a wide range of risk/return objectives. Some are based on quantitative or systematic processes, while others will be more qualitative in nature.

Investors often want a more conservative post-retirement portfolio than pre-retirement. They want to generate returns to match or exceed their specific income needs. Depending on the individual investor’s circumstances, multi-asset funds with a greater focus on managing volatility and downside risk – such as those with an absolute return target set against a specified time frame – could be taken into consideration. Some investors may prefer a multi-asset fund with a higher return target with a greater short-term volatility, but these higher risk funds may not be appropriate for all investors.

We believe an effective multi-asset portfolio should consider investing beyond mainstream equity and bond markets. By incorporating holdings that are less sensitive to overall market direction, a portfolio can access a broader range of risk premia, enabling a degree of diversification which traditional strategies cannot match.

A multi-asset fund may be placed alongside other strategies or approaches in a wider portfolio that is tailored to meet the investor’s specific needs and objectives.

Merits of actively-managed funds versus strategically-managed funds

In our opinion, multi-asset portfolios with a strategic asset allocation, where the target allocations are set for the long term, are deficient. Conventional approaches rely on a long-run assessment of return expectations, risk and cross-asset relationships to drive the allocation. We believe it is impossible to forecast the necessary critical inputs of returns, volatility and correlations with the degree of accuracy needed to have confidence in the outcome. The practical implications are large swings in performance, which is the last thing an investor wants when approaching, or after, retirement.

We advocate a more dynamic and flexible approach that places a greater emphasis on active asset allocation: understanding which environments are conducive for positive asset class performance (or associated with poor performance) is, in our view, more achievable than forecasting inputs with the degree of accuracy required by a strategic asset allocation approach.

The diagram below shows the frequency with which we change the asset allocation mix under this dynamic approach.

Source: Insight as at 31 December 2017. Positions are shown on a net basis. Cash: Includes cash at bank, FX forwards and money market instruments. 

A strategic blend of passive funds will rely entirely on market-based returns across the underlying asset classes. A multi-asset fund with a wider opportunity set – including the flexibility to invest in strategies that rely less on rising markets – has the potential to generate more consistent returns over time.

Examples of such ‘less directional’ strategies include relative value positions, which generate a profit or loss based on the spread of performance between two segments of the same asset class or markets – for example, a position that favours US treasuries relative to German bunds, or the euro relative to the US dollar. Strategies with the potential to generate returns if markets trade sideways are another example. Some real assets, such as infrastructure, also offer the potential for attractive, steady returns over time.

Some investors are wary of allowing the use of derivatives. However, if used appropriately, they add value and help in managing risk. In particular, they can assist multi-asset managers to switch exposures more swiftly and cost-effectively than if they invest in physical assets. The use of derivatives also allows investors to access sources of return that would otherwise be unavailable.

Choosing the right mix of returns versus risk

Individual investors approaching retirement are typically more sensitive to large negative movements (drawdowns) in their superannuation account than earlier in their lives. This drawdown can undermine confidence in retirement plans and impact their ability to fund lifestyle choices.

The right multi-asset portfolio could give the potential for growth over the longer term but with lower volatility than a narrower set of growth assets alone. For example, the diagram below shows the performance and maximum drawdown of various global equities, bond and hedge fund strategies against Insight's multi-asset mix since inception in 2004 (included to illustrate how using alternatives and dynamic allocations can add value).

Source: Insight and Bloomberg as at 31 December 2017. Returns shown gross of fees in AUD. The long-term track record of the Insight broad opportunities strategy has a base currency of USD. This performance record has been adjusted by interest rate differentials to derive an AUD proxy. Static asset allocation is based on a 60% global equities and 40% global government bonds allocation. Global equities represents MSCI World Index, net, hedged into AUD. Global Gov bonds represents JP Morgan GBI index hedged into AUD. Drawdown is calculated as the largest peak-to-trough change in the period, based on monthly data.

Lower volatility in returns also means investors are less likely to need to pre-determine a trigger date for switching into lower-returning assets as they should reduce the substantial drawdowns evident when investing largely in growth assets such as equities.

Multi-asset funds in the post-retirement, decumulation phase

After retirement, investors need to withdraw income from superannuation to live on. This can have a significant effect on their portfolio’s long-term potential. ‘Dollar cost ravaging’ is a term used to describe the impact of regular withdrawals after a portfolio has lost value – more assets need to be sold to generate the same amount of income, thereby damaging their super’s potential for future growth. It may be possible to manage the timing of withdrawals to lessen their long-term impact, but investors will typically expect to make regular withdrawals and are unlikely to have the flexibility to leave their pots to recover losses before taking out income.

Investors should be aware of the factors that could lead them to draw down more than they expect. Significant risks include:

  • longevity – that they live longer than they expect
  • inflation – that the cost of living rises by more than forecast
  • increase in spending needs – for example, to cover unexpected healthcare costs.

As their aim is to provide more consistent growth over time, multi-asset funds can sustain a liquidity buffer that can fund regular withdrawals and mitigate their impact on the portfolio’s longer-term growth potential. They can also provide some element of real returns which would help with the rising cost of living.

Source: Insight Investment as at 31 December 2017. The Insight broad opportunities strategy performance has been adjusted by interest rate differentials to derive an AUD proxy. These returns are gross of fees. Inception date 31 December 2004.

 

Matthew Merritt is Head of Multi-Asset Strategy Team at Insight Investment. This article is general information and does not consider the circumstances of any individual. Insight Investment is a sponsor of Cuffelinks.

RELATED ARTICLES

Stop treating the family home as a retirement sacred cow

In fact, most people have no super when they die

How decumulation in retirement differs from accumulation

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.