Risk must be factored into allocations

retirement financial advisers australian equities smsf essentials chief executive officer baby boomers equity markets interest rates financial adviser director

13 August 2013
| By Staff |
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As Australia's baby boomers approach retirement, there are few issues so pressing as portfolio protection.

And in the current environment, Russell Pillemer, director and chief executive officer of Pengana Capital, said that diversification is key.

"Interest rates have come down and fixed income isn't generating what it did previously," he said.

"You could live off 6 per cent from your money in the bank but it's going be very hard indeed to live off 2 or 3 per cent.

"So finding other ways of generating decent returns without having increased risk is, realistically, the only option."

Indeed, for Pillemer, it is that desire to avoid risk that should be giving investors pause when considering an increased allocation to Australian equities.

"The notion that you can get increased returns by investing in equities, in long only equities, by getting high dividend yielding stocks, by investing in the banks or whatever, that comes with risk," he said.

"And that risk is capital. So yes, you may be able to get some really nice dividends but share prices are volatile, and you're risking your capital by investing heavily in those types of stocks.

"So the key, we think, is to find strategies that are genuinely uncorrelated with the equity markets and with the other strategies in the portfolio; strategies which can still deliver you a high single digit or a low double digit return."

And according to Pillemer, such strategies exist and can be readily found if investors are willing to look around.

"We offer a number of strategies with betas of zero or near to zero but the majority of our business is in the retail market and high-net-worth market, the higher end of the IFA (independent financial adviser) market," he said.

"What we find there is that advisers are very sensitive about outcomes for their clients, as opposed to costs.

"For them, it's all about delivering a good outcome for their clients and, in particular, managing downside risk for their clients," Pillemer continued.

"They are far less concerned about what happens if the markets shoot the lights out next year and they underperform - that's just not an issue for them.

"For them, the big issue is what happens if the markets crash next year, what happens to my clients?"

Originally published on SMSF Essentials.

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