High allocations to growth not a ‘poor strategy’ for pre-retirees

Adopting high allocations to growth assets is not inherently a poor strategy, even when members are approaching retirement, according to a report.

A paper written by Richard Dunn and Michael Berg called ‘Lifecycle Design – To and Through Retirement’ found that high growth asset funds improved outcomes when members were young, as a result of the ability to spread risk over the member’s investment horizon, without material risk of under-performance in poor investment scenarios.

It also found that high allocation to growth assets improved outcomes where members were approaching retirement and investment outcomes were either neutral or strong, due to the higher expected return on growth assets.

The report that was presented at the 27th Colloquium on Pensions and Retirement Research noted that high growth allocations would provide marginally weaker outcomes, less than 5% underperformance over a member’s lifetime, in cases where investment performance was weak.

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On the defensively focused lifecycle investments side – first-generation lifecycle strategies – the report said would “typically underperform other strategies unless investment returns were poor and the members it was designed for were approaching or were actively retired.”

Two-dimensional lifecycle strategies were also found to provide the ability to access material excess return by adopting a more growth-orientated stance while still being able to control the level of risk adopted by members.

“We would emphasise that it there is unlikely to be a single solution that meets the needs of all funds for all member cohorts. In ensuring that a funds default investment strategy design meets the needs of members, we anticipate that funds will need to regularly conduct regular reviews,” the report said.

“We anticipate that these reviews will include refreshed analysis of member segments and investment outlook to ensure that the fund’s proposition continues to optimise likely member outcomes.”

The reported noted that investment horizons were a critical driver in setting an appropriate investment strategy.

“…we consider it prudent that funds develop investment strategies which account for the range of investment horizons to which members are likely to be subject, both before and after retirement,” the paper said.