How your client's longer life impacts portfolio construction
Accumulating capital for retirement has, for decades, been underpinned by traditional portfolio construction thinking.
This presents a problem for retirees in the decumulation – or income drawdown - phase of their life journey. The reality is that people are living longer and as a result, their capital is at risk of not lasting. So say Leigh Köhler, head of Business Solutions and Rafiq Taylor, head of Implemented Consulting at Glacier Invest, who frame a compelling argument for rethinking portfolio construction and creating the difference between financial want or a comfortable life into old age for clients.
What keeps retirees awake at night
How long will I live? How much income will I need? Will my money last until I die? These questions plague retirees, and we have more to add, says Köhler: What is the risk to my accumulated money? How will volatility in the market impact on my decumulation?
Clients don’t want to lose money in down-markets and want to capture all the upside when markets are rising – vitally important to clients who are decumulating, says Taylor. Retirees face two explicit risks to their income:
1. loss of capital; and
2. sequence risk – the risk that the order, timing and volatility of investment returns are unfavourable.
To solve these problems, we need to find ways to minimise the downside and maximise the upside. We look to investments that provide asymmetric payoff (investment capabilities that are geared to provide capital protection and upside participation when the opportunity arises), says Köhler. Therefore, how we think about portfolio construction is critical.
Expertise and research muscle
Köhler said that leveraging off the biggest multi-managed investment team in South Africa helps to find asset managers with strategies that allow for tailoring portfolios according to clients’ objectives. The Glacier Invest team knows what it takes to tactically position portfolios. They also know what intermediaries should look for in a Discretionary Fund Manager (DFM) to assist in achieving optimal portfolio construction.
The manager should:
1. listen to, and understand intermediaries and their clients’ objectives;
2. be able to focus on different approaches to portfolio construction in the funds they select;
3. support portfolio construction that focuses on accumulation as well as decumulation;
4. do in-depth fund manager research and have extensive intellectual resources to ensure that asset managers, classes and strategies are deliberately combined;
5. have scalability, to negotiate better fees;
6. have the leverage of a trusted shareholder that has stood the test of time.
In the final analysis, clients’ financial futures depend on intermediaries’ skill and insight but more importantly, the quality of the DFM with whom they partner.