Boutique fund manager Merlon Capital Partners has released a new paper Rethinking post-retirement asset allocation, arguing that higher allocations to equities in post-retirement portfolios, with a simple hedging strategy, can improve income and returns with less risk.
The paper discusses differences between pre- and post-retirement asset allocation and explores the priorities of retirees and their risk appetiteMain insights from the paper include:
Main insights from the paper include:
- Many investors overlook the benefit of allocating to shares which can provide in the way of growing tax-effective income in the post-retirement phase.
- Many investors overlook the benefit of allocating to shares which can provide in the way of growing tax-effective income in the post-retirement phase.
- Traditional retirement allocations are heavy on fixed income. However fixed income may not be able to deliver the same absolute returns going forward.
- Dividends and franking credits from Australian shares have provided very consistent returns over multiple time periods that can keep pace with minimum drawdown requirements and inflation risk that pension-phase investors face.
- Two key investment risks for retirees are sequencing risk, which is the risk of large market falls early in retirement when both wealth and spending is often high, and longevity risk, which is the risk of outliving one’s savings once inflation is taken into account. Normally, retirement asset allocation is perceived as a trade-off between these two risk factors.
- A meaningful reduction in both of these risks can be achieved when a transparent downside protection strategy that reduces capital risk but leaves full exposure to these dividends and franking credits is implemented.
- Merlon’s investment approach of avoiding index hugging and only investing in sustainable free cash-flow producing companies has enhanced these factors. This results in both much better risk adjusted returns and higher income, and gives retirees the potential to safely increase their allocation to equities and thus their returns in retirement.