Jason Teh

Financial advisers may need to consider allocating more to defensive equity strategies for retiree clients to defend their income, according to Vertium Asset Management, a Copia investment partner.

In its June quarter research paper, the equity income fund manager compared the past seven sharemarket corrections during global slowdowns since 1990 to the most recent correction in December 2018. For each correction the average decline in the sharemarket index was 19% and the recovery time (from low to high) was 1.4 years.

But the most recent December 2018 equity market dip has been different, recording only half of the historical decline (11%) and one third of the recovery duration (5 months). The question is then will the market continue its unusually quick recovery, or will it follow the more common scenario of protracted recovery with possibly even another downward correction.

Vertium Chief Investment Officer Jason Teh said “one effective way retirement portfolios can be better shielded from a correction is lowering the sensitivity to equity market movements. An efficient way to achieve this is to allocate more to funds with low correlation to the market, so if the market declines, that portfolio is not fully tethered to the decline in capital values.”

For example, the Vertium Equity Income Fund has one of the lowest sensitivities with the sharemarket among equity income funds in its peer group. Vertium has calculated its volatility risk measure is half that of the S&P/ASX 300 Index, with a Beta measure of 0.5. When the sharemarket dipped in the December 2018 quarter, the low sensitivity was put into practice and the Fund’s capital value was cushioned by about 50%.

John Clothier, General Manager of Distribution for Copia said “our financial adviser clients are increasingly expressing concerns about of a lack of attractive income options for retirees, as well as the likelihood of a pull-back in equity markets. We have had increased interest in the Vertium Equity Income Fund due to its very low equity market sensitivity that can help protect capital, without denting any of the income potential for investors.”

The Vertium Equity Income Fund is currently expected to deliver 6% income over the next twelve months.

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