Demographic change forces wealth managers to rethink retirement strategies

Nate Tooft, chief investment officer at Manulife Asset Management, said his clients, when they reach retirement, are likely to have as much as 50 per cent of their portfolio in equities, with this allocation tapering in subsequent years.

This is higher than traditional portfolio composition for retirement, when the bulk of a portfolio would have been in lower-risk, income-generating funds such as gilt and other fixed income funds.

Tooft said the composition of the equities within a portfolio nowadays would also be different to what was the case historically, with more of the companies owned being “growth” in nature-that is, not owned primarily for their income generating potential.

Our decision to allocate to growth-type assets would be predicated on a macro environment that naturally supports their relative outperformance.Eren Osman, Arbuthnot Latham

Tooft said the major reason for this evolution was that clients tend to live longer in retirement, something which he said creates the need to continue to grow the pot in retirement, rather than just take an income from the pot, which was the case in the past.

He said he was sceptical of the investment case for long-duration government bonds in retirement income portfolios. 

Those assets have historically been there to provide diversification away from equities. 

His view was that while bond yields have risen, he expected there to be significant volatility around the prices of those assets, and so an elevated risk of capital loss, which reduces the “safe haven” status of long duration government debt.

Tooft’s view is that while inflation may fall from here, “it is likely to be more volatile in future than we have become used to", he said.

He added: "At the same time, government spending, including on initiatives such as net zero, will mean that bond issuance remains high, which also would be expected to put downward pressure on government bond pricing."

Risk and reward

Alan Kinnaird, business development manager at Walker Crips Investment Management, said clients faced with the prospect of a longer retirement must be more conscious of the risk that, if they invest in the highest yielding assets, they could incur a capital loss as the value of the asset falls.

A client with the expectation of only a short number of years to spend in retirement may be relatively unconcerned about the risk of capital loss over the longer-term, if it means a higher level of income today. 

A dissenting voice came from Eren Osman, managing director for wealth at investment bank Arbuthnot Latham.

He said: “Rather than being informed by the investment time horizon for a client, our decision to allocate to growth-type assets would be predicated on a macro environment that naturally supports their relative outperformance.

"Such an environment would include falling inflation and interest rates with stable or falling growth.

"Conversely, with strong manufacturing and trade data suggesting an improvement in economic activity and interest cuts being pushed out further, the forecast environment would more likely favour smaller companies and sectors more cyclically exposed to the underlying economy.”

David.Thorpe@ft.com