A combination of the post-global financial crisis and longer life expectancies in Australia has brought sequencing risk, and strategies to manage it, to the forefront, says Chad Padowitz, chief investment officer of Wingate Asset Management.
“Retirees and pre-retirees may not be familiar with the term ‘sequencing risk’ but they would almost certainly recognise its impact on their superannuation savings,” Mr Padowitz said.
“Many of those who have retired over the past few years, or are planning to retire soon, have found themselves caught between a rock and a hard place – their retirement savings have been severely depleted by the market downturn at a time when they are starting to draw down a pension.
“This is sequencing risk – the risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments.
“The key challenge facing older Australians – and those who advise them and who manage their superannuation funds – is how to mitigate sequencing risk so that superannuation savings last long enough to ensure a comfortable retirement.”
Mr Padowitz said traditional ‘de-risking’ strategies, such as changing asset classes or changing investment styles, can have unintended consequences.
“Switching to a different asset class at retirement age – for instance, from equities to fixed income – could reduce the expected return at a time when investors most need to maintain their superannuation balances.
“Similarly, changing investment styles may lead to a concentration of risk. Both these approaches basically rely on getting market timing right, which history has always shown to be impossible.
“Generally speaking, in order to achieve the kind of comfortable retirement that they want, most Australians need a significantly higher return from their investments than they realise.
“The simple answer is that retirees should maintain an allocation in equities, despite the ongoing volatility, and instead find ways to generate consistent returns from this asset class while at the same time lowering ‘downside risk’ – the risk of an investment losing value if market conditions change.
“This includes having a truly diversified equities exposure, something that is difficult to achieve solely in the Australian equities market which is mainly made up of banks and commodities. International equities need to be considered.
“For instance, our investment strategy seeks to capture most of the market’s gains and less of its declines, ultimately delivering more stable returns.
“A smoother and more regular performance approach is much more valuable for investors in the long term than one that has highs but also lows.
“The key point for investors is to look beyond the traditional approaches on retirement, and find a strategy that deals with future volatility and lower levels of expected return,” Mr Padowitz said.
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: 03 9913 0704
13 June 2012