While current investment approaches in superannuation serve those accumulating super well, there is opportunity for funds to create more bespoke investment approaches for those who are in the retirement phase, AMP Capital believes.
The firm’s senior portfolio manager, multi-asset group, Darren Beesley, said that differences in retirees’ super objectives meant that one-size-fits-all investment practices used in the accumulation phase don’t always suit those in drawdown.
He pointed to defining risk by the growth/defensive split, underutilising tax trade-offs, holding a static asset allocation, having less focus on inflation risk and thinking ‘defensive’ assets are actually defensive as some such investment practices.
“It’s no longer just about total returns within a growth/defensive bucket,” Beesley said.
He believed that superannuation funds needed to ensure that retirees’ portfolios had the following attributes designed to address risks and needs in retirement:
- Defining risk by what could be lost in a stressed environment;
- Hedging against large losses using tactical tail risk hedging instruments such as options;
- Factoring in the tax implications of franking credits;
- Applying dynamic asset allocation to avoid expensive asset classes and protect capital;
- Explicitly thinking about the risk of inflation to the retiree and holding inflation hedges; and
- Skewing the portfolio toward income where reasonable, but not at any price.
“As the amount of assets entering retirement continues to grow, we believe the industry will invest differently for those in retirement. Risk needs to be defined differently, tax needs to be accounted for, and the stability of return needs greater focus,” Beesley said.
He warned that investors should be asking whether their post-retirement funds were making such adjustments.