The growing view that a different investment portfolio – skewed to income and capital preservation – is needed when investors retire can lead to poor outcomes, warns Chad Padowitz, chief investment officer of Wingate Asset Management.
“The belief that an ‘investment reset’ is needed is being further entrenched and confused by an increasingly bewildering number of retirement products coming on the markets.
“Pre-retirees need to ensure there are no unintended risks inherent in any new investment strategy developed as they start focussing on superannuation pension income.”
Mr Padowitz said that recent attention has been given to what has been called sequencing risk, the impact on retirement income of uneven return outcomes.
“The capital risks of equity investments have been brought home to investors in recent years – especially those who are about to retire – as many have seen erosion of their superannuation.
“When stock markets suffer large declines near or during retirement, the impact on future income because a retiree ends up with less capital to invest, can be significant.
“With Australians living longer in retirement sequencing risk is an increasingly important issue,” he said.
However, Mr Padowitz added that while increasing yield investments at retirement is important, understanding all the risks involved, especially those associated with any additional investments being considered, is a critical step in new strategy development.
“With equities, retirees should ask themselves whether now is the right time to be selling, especially with the risk of further cuts to interest rates and the impact this has on cash returns.
“Switching out of equities into very low return assets appears safe short term but actually increases long term risks for retirees.
“It may provide adequate pension income in the short term but be unable to support changing needs throughout retirement.
“Dramatically changing investment styles may well lead to a concentration of risk as many approaches basically rely on getting market timing right, which history has always shown to be impossible.
“Part of the answer is that retirees should maintain a balanced investment portfolio. This includes retaining an allocation to growth assets, such as equities despite their volatility, coupled with finding ways to generate consistent income returns from this asset class.”
Mr Padowitz says that managing risk includes having a truly diversified equities exposure – which includes diversity of sectors as well as the potential for capital growth and yield.
“This is difficult to achieve solely in the Australian equities market due to the concentration of banks and commodities companies.
“For retirees seeking pension income and reducing sequencing risks, a smoother and more regular performance approach is far more valuable in the long term than one that has significant volatility.”
Wingate Asset Management is a joint venture between Australian Unity Investments and Melbourne-based Wingate Group. It is a boutique international equities fund manager with a large-company, value-based, investment philosophy. Its investment process seeks to produce positive compounding returns for investors over the medium to long term.
Wingate’s approach is to invest in a concentrated portfolio of high-quality companies from around the world.
For more information please contact:
Chad Padowitz – Phone: 0414 016 400
8 November 2012