Investors need objective-based strategies
Post-retirement requires that Australian superannuation funds look to objective-based strategies that can protect members from future market volatility, according to Standard Life Investments.
Advocating that funds move past the traditional balanced fund approach, David Millar, investment director for multi-asset investing at Standard Life Investments, said that developments across the superannuation industry and ongoing market uncertainty necessitated a re-evaluation of investment strategies.
“The proportion of super fund members who will move from the pre-retirement to the post-retirement stage will increase three fold over the next decade, and with longer life expectancy we will face the ultimate post-retirement challenge – will members have enough to retire on?” he said.
In a superannuation landscape where investment markets continued to be uncertain, Millar said that the lack of diversification within balanced funds had never been more apparent.
“A large proportion of assets within a balanced portfolio are essentially risky assets,” he said.
“Some are more risky than others, but they all possess risk characteristics to varying degrees.”
“Balanced funds by their very design will leave super fund members exposed to the effects of adverse markets, particularly as they approach the crucial period leading up to and in retirement.”
Pointing out that the majority of superannuants were placed in balanced funds by default, Millar said that it was a choice that often rolled into post-retirement.
"If we face another GFC-like shock, the loss in superannuation could be up to 15 per cent and a member's superannuation could run out about 7 years earlier than might otherwise be expected,” he said.
“Ultimately, having investment portfolios that are at less risk of drawdown of this magnitude becomes important.”
With this likelihood firmly in mind, Millar believes using objective-based absolute return strategies, some of which may adopt a multi-asset, multi-strategy approach, are the way forward.
“Cash, or inflation, is normally the benchmark for objective-based strategies,” he said.
“This means the manager has the freedom to invest in different geographies and markets, investing wherever they see the best prospects.
“With an absolute return mandate the investment manager cannot use equity bear markets or credit crunches as reasons for not delivering positive performance.”
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