On the defensive
Now that the default choice for prospective retirees is no longer to purchase an annuity, how does this change portfolio construction for the longer term?
Kearney captures the dilemma around the growing dependence people have on their portfolio as they get older, meaning exposure to defensive assets should increase to reflect the unwanted volatility and risk.
“The government bond safe haven is really no longer with us. A broad mix of lower risk and less volatile assets remains key. It is also important to carry some equity too, as this should help offset inflation, which is ever present,” he adds.
For Yeates, the increasingly small numbers taking an annuity payment and the logic of derisking up to the selected retirement date no longer makes sense, as many people are staying invested long beyond their retirement.
“Many investors should not be looking to automatically derisk. Following such an approach may increase the risk of not hitting their retirement goals,” adds Yeates.
Elliot says the response from financial advisers has been to compensate for the increased risk for those entering retirement still invested by diversifying the source of returns (and of risk).
They have been helped in this by the fund management industry, which has developed a broad range of multi-asset funds.
“The days of a balanced fund being just equities, bonds and a little property are gone. Instead, we have a broad range of ‘alternatives’ that we can add to multi-asset portfolios. These will include asset classes that, 20 years ago, were relatively inaccessible to the average client, such as exposure to private equity and infrastructure,” he says.
So how is portfolio construction today impacted by long-term changes to how we live, work and consume?
Longevity is one of the greatest risks, given most investment portfolios do not provide enough growth to compensate for this, says Shaniel Ramjee, senior investment manager, multi-asset, at Pictet Asset Management.
He also notes the risk of higher inflation requires a more equity growth objective, so investors that are too conservative in their investment decisions might find they fall short of objectives.
“Asset allocation styles that are able to derisk completely by meaningfully changing the asset allocation to defend capital will be needed to avoid disastrous years in markets."
On the cusp of change
Guilhem Savry, head of macro and dynamic allocation at Unigestion, highlights current themes – such as digitalisation or environmental, social and governance considerations) – that illustrate how the way we live, work, consume and think interacts with asset returns and portfolio construction.
“Climate risk should be integrated into portfolios,” he adds.
Kearney says: “The speed of change has been immense over the past year. The most amazing achievement has been the discovery, production and distribution of a vaccine in months.