Market volatility a 'red herring' for decumulation clients


Recent market volatility is "a complete red herring", according to Thesis Asset Management’s Lawrence Cook, who warned long-term erosion of capital was the bigger problem for clients in decumulation.

In a video interview with FTAdviser's sister publication Money Management Mr Cook spoke about the impact of the return of volatility in stock markets on clients in the decumulation phase.

He said: "Volatility itself, we believe, is a complete red herring. But it’s the obvious one to hunt down because one can see it in the markets.

"But volatility itself isn’t necessarily a problem. Long-term erosion of capital is the problem."

Mr Cook, who is a director at Thesis Asset Management, told Money Management’s Craig Rickman: "I think if we pursue a strategy that’s focused on trying to get rid of volatility what that tends to lead to is a sub-optimal asset allocation, which doesn’t have enough of the good stuff – i.e. equities – which is the asset class we know is most likely to sustain capital and income requirements in the long run.

"And we’ve seen quite a lot of disillusionment, for instance in the absolute return sector, which has probably quite successfully removed volatility, but at a big price where clients have not really had the real returns they might want and need for the long run."

Asked why decumulation had become such a hot topic, he explained there were a number of drivers.

"It’s as far back as 2015 that the regulator made it quite clear that they thought if you risk profiled a client at, say, a three out of 10 in the accumulation phase, then it’s unlikely the investment solution, even for the same risk profile, is appropriate for the decumulation phase. 

"I think the other driver is more of a bottom-up revolution from financial planners who we sense – and we know from talking to them – are increasingly frustrated about the lack of innovation from investment managers, fund managers and discretionary managers alike. 

"So I think that’s coming to a head."

He added recent market volatility had served to heighten people’s concerns in this respect.

But Mr Cook acknowledged pound cost ravaging was a "big issue" in the decumulation phase.

"Lots of volatility at the wrong time, combined with sequencing risk, can mean a degradation of the portfolio in the early years. And if you get off to a bad start there’s a high correlation with poor sustainability of income in the long run," he said.

Watch the full interview at the top of the page.