The retirement solution checklist 2.0

Focus on the outcomes, not the income

The Multi-Asset team shares its latest ‘retirement checklist’, comprising three core questions that help investors double check whether their existing strategy is as active and differentiated as their needs demand.

23 May 2022

5 minutes

Ellie Clapton
Atul Shinh
The Multi-Asset team shares its latest ‘retirement checklist’, comprising three core questions that help investors double check whether their existing strategy is as active and differentiated as their needs demand.

Fast view

  • Retirees comprise a substantial cross-section of society, but there is no silver bullet for their needs, which can vary substantially. Therefore, so must the solutions.
  • In the environment ahead, which is likely to be dominated by concerns around inflation and central bank tightening, we believe investors should take an active approach to access different sources of return and means of managing risk; i.e focus on the outcomes, not just the income.
  • Our Retirement Solution Checklist 2.0 – comprising three core questions – can be used to identify whether the solutions you are using are truly active and provide a genuinely differentiated outcome to passive alternatives.
  • We believe our Multi-Asset solutions – ranging from the lower risk Diversified Income Fund through to Global Income Opportunities and Global Macro Allocation – are well placed to help retirees meet their needs, whether focused on income, wealth accumulation or capital growth.

Acclimatising to a shifting landscape

The dial has shifted across a range of issues, from pandemics to policy, as well as from geopolitics to inflation. The latter, in particular, has implications for investors, not only in relation to returns but also with respect to the management of risk. As markets readjust to this new environment, portfolios must do the same if client outcomes are to be met.

In previous years, investors could rely on a portfolio of equities and bonds to meet their desired outcome; for example, the ‘60/40 portfolio’ was long revered as a trusty guidepost for a moderate investor – a 60% allocation to equities with the intention of providing capital appreciation and a 40% allocation to fixed income to potentially offer income and risk mitigation.

Seeking differentiated returns, while also managing risk

However, investors must recalibrate expectations and come to terms with the reality that the stellar returns of recent years are more likely to be challenged. Especially when considering the potential for higher inflation that could not only take a bite out of returns but also leave investors exposed to additional risk as bonds’ ability to provide sufficient defensive diversification comes to an end.

One way investors can improve outcomes is by allocating to those active managers that are able to deliver a differentiated outcome by identifying alternative sources of return as well as a means of managing risk. We believe those actively managed strategies that are able to deliver truly differentiated outcomes, consistently through time, can be used as either a building block in bespoke portfolios or as a complement to more traditional passive, strategic asset allocation solutions.

We believe our Retirement Solution Checklist 2.0 – comprising three core questions – can be used to identify whether the solutions you are using are truly active and provide a genuinely differentiated outcome to passive multi-asset vehicles.

Q1. Is my strategy focused on outcome or income?
“It doesn’t matter whether a cat is black or white, as long as it catches mice.” – Deng Xiaoping
  • Total return vs natural income? We think the same philosophy that Deng adhered to can be applied here; it doesn’t matter if income needs are met by funds with income in their name or not. Income remains the most important component of total return across asset classes. The predictability of that income stream can be particularly useful for those with a low risk budget or near-term time horizons – whether the client takes the natural income or reinvests it. We believe that ultimately the focus should be on the outcome, not the income.
  • There’s no such thing as an average retiree: Clients have varying time horizons, risk appetites, and even sources of supplementary income and therefore each individual will require a different outcome. However, what is certain is that the multi-asset solution of choice must deliver on its outcome consistently, so that it can be used to meet client outcomes with confidence.
  • Investors should not solely rely on passive products: We believe active solutions can complement existing passive allocations, but they must work hard whatever the risk profile in order to deliver an outcome that is truly differentiated.
Q2. Is my strategy able to access the range of return drivers required to deliver the desired outcome in a low return world?

We continue to believe that income is an important driver of total returns given its reliability and predictability. However, if an investor requires a level of return that is greater than what is naturally available from income producing securities (c.4% on average from a multi-asset universe), then we believe the below are examples of return drivers that active managers could access:

  • Breadth: A broad universe of liquid assets today incorporates global equities, fixed income, and currency. We believe active managers who invest without bias across this multi-asset universe maximise the opportunity set. This increases the likelihood of uncovering attractive investments across the cycle whilst avoiding having to depend on the returns from a single asset class.
  • Structural long-term themes: Identifying and understanding structural macro themes and imbalances, which will influence the global economy and asset prices on a multi-year horizon, can be a valuable source of returns as it enables the depth and conviction that is required to add to favoured investments in the face of volatility.
  • Dynamic asset allocation: Flexibility is required to improve on the prospective returns of traditional asset classes and requires a dynamic and counter-cyclical approach to asset allocation. Actively managed solutions should be allocating capital when valuations are cheap and then on the other hand, withdrawing that capital and seeking to preserve it when valuations are quite extended, and there is prospective macro weakness on the horizon.
  • Bottom-up security selection: Valuations look extended across a number of asset classes; we believe an active manager that delves deeper to identify individual securities that are attractively valued is better placed to generate a compelling level of returns.

The multi-asset universe contains a broad range of investment opportunities

The multi-asset universe contains a broad range of investment opportunities

Source: Ninety One, April 2022.

Q2. Is my strategy able to identify alternative ways to manage risk that does not rely solely on bonds for diversification?

For the best part of the last four decades, prices between equities and bonds have moved in different directions (negative correlation) meaning passive multi-asset funds could confidently rely on bonds to provide diversification against equity weakness and smooth the fluctuations in portfolio asset values through time.

However, a backdrop of tighter monetary policy and rising bond yields, together with a structurally higher level of inflation causes stock and bond returns to move more frequently in the same direction. This occurred in 2018 when central banks last tightened policy and we have seen that again over recent months. Relying on those strategies that follow the same roadmap (static asset allocation) and rely on bonds alone for diversification may find meeting client outcomes a challenge looking forward.

We believe an active manager should be able to navigate such an environment by identifying alternatives way of managing risk:

Look under the bonnet: When combining securities together, instead of focusing on what an asset is labelled (i.e. a ‘bond’ or an ‘equity’), active managers should focus on behaviours, which includes a consideration of their volatility and correlations, and how these might change. To us, there are only three types of assets: Growth, Defensive or Uncorrelated. Behaviours provide a more accurate picture of susceptibility of a fund to a fall in markets – in contrast to asset labels, which can be misleading – and helps to provide structural diversification.

Adjust risk exposures: Not all eventualities can be positioned and therefore it is important that active managers are able to react to a changing market environment and provide defence when defence matters – even for those strategies with a higher risk budget:

  • Dynamic asset allocation can be a means for those strategies with a sufficient risk budget to not only deliver returns but to also manage risk. Such flexibility means material allocations can be made to defensive assets during periods of equity market turmoil.
  • For those strategies that are looking to deliver a more defensive outcome, and therefore may not have the risk budget to materially change the physical asset allocations, alternative instruments can be used to reduce risk and hedge against capital loss whilst maintaining allocations to the underlying securities.

A strategy that has access to a broad toolkit and is able to be flexible and adjust the level of risk should be better placed to provide outcomes that are more consistent and robust than passive approaches, in our view.

Closing thoughts

Whether you are looking for complementary building blocks within your managed portfolio service or a differentiated solution for your current multi-asset fund choice, we believe Ninety One provides a unique approach that can contribute to the true diversification that we believe is required to meet your client outcomes in the environment ahead. Our multi-asset portfolio construction seeks to reduce volatility, while delivering a cost effective, smoother performance profile.

Our portfolios seek to deliver a smoother performance profile

Our portfolios seek to deliver a smoother performance profile

Past performance is not a reliable indicator of future results; losses may be made. Forecasts are inherently limited and modelling involves risks, assumptions and uncertainties, they are forward looking and are not guarantees nor a reliable indicator of future results. Actual returns could be materially higher or lower than projected. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance.

Source: Ninety One proprietary capital market assumptions as at 31 March 2022. These estimates reflect the view of Ninety One’s multi-asset team, whilst the views of other teams across Ninety One may differ. Details on our Capital Market Assumptions methodology available upon request. 60% equities/40% government bonds. Historic outcome = historic 10 year outcome.

General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Government securities exposure: The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the Fund’s prospectus.

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Authored by

Ellie Clapton
Portfolio Specialist
Atul Shinh
Investment Director

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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