Managing Tail Risk to Reduce Sequencing and Longevity Risk
Don Hamson
Plato is working with Milliman to overcome the problems of sequencing and longevity risk by developing risk management strategies that will aim to enable investors to maintain higher weightings in growth assets whilst providing tail risk management in times of financial crises like the global financial crisis (“GFC”).
The GFC highlighted the limitations of traditional balanced funds. As a response many superannuation funds are developing “lifecycle” strategies which progressively de-risk investments as members approach retirement. Unfortunately for many superannuants, reducing sequencing risk in this way simply increases longevity risk, and investment projections show that fund members and investors cannot afford to accept the lower returns associated with less risky portfolios
“The issues that impact retirees and how they should invest are substantially different from those of investors focused on the accumulation of wealth. Our focus on after tax investment approaches was the first step in acknowledging these issues.” said Dr Don Hamson, Founder & Managing Director of Plato Investment Management.
“Over the last couple of years, we have focused our research efforts on the impact that sequencing risk can have on retiree portfolios and potential solutions to this problem. This has been in direct response to our clients who have been disappointed with the poor returns offered by cash and fixed income, but who are still haunted by the GFC when it comes to investing in equity markets. Through our work with Milliman, we intend to provide our clients with access to an institutional quality risk management platform and approach that services some of the largest organisations around the globe.” said Dr Hamson.
Wade Matterson, Practice Leader of Milliman said, “We are excited to be working with Plato to help address these issues for their clients. Retirees are faced with a risk tolerance paradox where they need to simultaneously invest for growth, but have to be insulated from market events and financial crises.
Combining a growth oriented investment strategy with the management of volatility and equity market risk via the Milliman Managed Risk Strategy (MMRS) provides the opportunity to invest in a more sustainable way given the ever increasing length of retirement and the need to maintain purchasing power over time.”
“By delivering the MMRS as an overlay to Plato’s existing fund, advisers and their clients will gain access to a best of breed risk management methodology applied to Plato’s proven equity investment approach.” said Mr Matterson.
“This is a first for the Australian market and further illustrates our focus on the development of innovative investment approaches for retirees.” added Dr Hamson. “Milliman is a global market leader when it comes to managing market risk for its clients.”