Australians saving for retirement are taking on significantly more risk in their investment portfolio than their global counterparts through a lack of allocation to fixed income securities, according to Daintree Capital.
This is particularly concerning given their income level in retirement is not guaranteed, the boutique investment manager said.
Despite the nation having one of the highest savings rates in the world thanks to its compulsory super system, a closer look at Australian retirement funds revealed they contained on average an almost 50 per cent allocation to equities, significantly higher than other developed nations such as the UK and Canada.
Daintree Capital director Justin Tyler said the heavy weighting to growth assets was driven by Australians’ lack of familiarity with the bond market and their eagerness to take advantage of the Australia’s generous franking credit regime.
However, this resulted in additional volatility and sequencing risks for retirees, he said.
“Equities may be better understood by most investors as an asset class, but fixed income plays an equally important role in a portfolio – one of insurance. The fixed-interest component of a portfolio smooths out negative returns to limit falls in a portfolio’s value when equity markets go south,” Tyler said.
Tyler said research compiled by Daintree Capital showed that a portfolio compiled of 50 per cent ASX 100 shares and 50 per cent an index fund tracking the AusBond Credit FRN Index would have generated around half the volatility of a pure equities portfolio from 2005 to the present day.
“Australian retirement funds on average have just a 14 per cent allocation to bonds, compared to a 22 per cent average in the US and 36 per cent in the UK, so it would seem that those approaching retirement are taking excessive risks with their savings in exposing themselves to the twists and turns of the equity market,” he said.
“This is particularly the case given that Australian retirement savings are made up almost entirely of ‘defined contribution’ style schemes – meaning income in retirement is dependent upon the investment returns generated by the fund, rather than linked to an individual’s working salary as it is in many other markets.”