Jonathan Armitage
One of Australia’s largest pension payers, Colonial First State (CFS), has shed light on how financial advisers are helping clients through the current period of market volatility.
Speaking at an event attended by more than 400 CFS superannuation members and advisers, recently appointed CFS Chief Investment Officer, Jonathan Armitage and Executive Director Technical Services, Craig Day led a panel discussion on investing for retirement, covering a range of macroeconomic trends and showcasing strategies financial planners are using to protect clients in the pre or post retirement phases of their lives.
“While the world has experienced an extraordinary period of economic growth and subsequent strong investment returns over the past 30 years, this year we’ve seen a confluence of issues impact superannuation performance,” said Mr Armitage.
“The pandemic, tragic events in Ukraine, supply chain disruptions and a range of other geopolitical issues have led to a rise in inflation and interest rates, creating a period of significant market volatility,” he said.
“Our primary message to both advisers and members is to maintain a long-term view of investments.”
“Our research shows that if members had, for example, moved money from shares and bonds to cash during the GFC period, their super balance would have been significantly lower today in comparison to the amount they would have accumulated had they stayed invested in their original portfolio (see chart below).
“While it might feel tense during periods of market volatility, markets do recover and it’s important that members think about taking advantage of that,” said Mr Armitage.
Take advantage of growing returns in the fixed income securities market
Mr Armitage noted that during the recent long period of low interest rates, income generating assets – which are critical in the retirement phase – had been difficult to find.
“While we’ve seen some sharp adjustments from a return perspective, we’re now starting to notice fixed income securities produce returns which allow retirees to have a reasonable level of income,” Mr Armitage said.
“There will be bumps along the way but we’re seeing a normalisation of interest rate policies feeding into fixed income securities, giving advisers an opportunity to consider resetting client portfolios to take advantage of that,” he added.
Build a buffer to reduce longevity risk
Mr Day addressed a key concern of many superannuation members in running out of money and being dependent on the age pension during their retirement years.
“Termed longevity risk, this is where people potentially outlive their life expectancy and exhaust their retirement savings,” Mr Day said.
“In this case, it’s important to remember life expectancy figures are averages which means half the population will outlive their life expectancy. Life expectancy also generally improves over time with advancements in health and medical science. A good adviser will factor all this in when determining retirement income levels, to minimise the risk of their client outliving their savings.”
Prioritise mortgage over super
Mr Day went on to explain that great outcomes for super fund members are not just about investment returns – there are other strategies that can be employed.
“A question I’m often asked is whether to allocate surplus cash flow in the lead up to retirement to paying off the mortgage or building a super balance,” Mr Day said.
“From a straight numbers perspective, people are generally better off targeting their mortgage first. In addition, there has been lots of studies that show that home owners generally get better outcomes in retirement. Owning a home outright at or near retirement is also very important as it provides the flexibility for members to adopt a super-boosting strategy, such as downsizing their home or increasing their contributions as part of a transition to retirement plan.”