Income key for retiree market

Fund managers should start shifting their approach to considering what investors need rather than carving up the market when developing product, according to Legg Mason head of property securities Ashton Reid.

Reid said the retiree market was an area that has not been well catered for in the past, and he hoped to see an evolution of products that adopted a new approach away from total return and getting to what clients wanted — income.

“Fund managers need to look at what investors need as opposed to how the market is carved up,” said Reid.

He said Legg Mason saw a demand for simple, unstructured and transparent products, with a local focus and where return was skewed to dividend and income. Reid said retirees also wanted to see growth so that their income stream matched their cost of living over time and their standard of living could be maintained in the face of inflation through real capital preservation.

Reid said this shift in thinking presented a real opportunity for fund managers to demonstrate their skills in identifying less risky stocks that also delivered enhanced yield.

“Retirees are looking for a solution that doesn’t have exotic derivative mechanisms, is easy to understand, and where there is an element of comfort in knowing that their money is invested in things they understand,” he said, referring to tangible assets such as property, infrastructure and utilities.

Reid said traditionally balanced portfolio allocations would look at total return versus risk, and therefore a conservative asset allocation would probably be made up of 64 per cent defensive assets (bonds and cash), 15 per cent hard assets (listed and direct property, and infrastructure), and 21 per cent growth assets (Australian and global equities). However, Reid said that for the retiree market the focus should be on income versus risk, which changed the perspective on asset allocation and provided a greater opportunity for a sustainable, growing income stream. This shift may result in a slightly higher allocation to growth and hard assets, without necessarily providing additional risk, Reid said.

He said Legg Mason hoped to take advantage of the retiree gap in the market through the launch of its Australian Real Income fund in February next year, which was specifically designed taking all the aforementioned issues into account.