Caution urged on market-linked products

Asset managers need to be careful that any market-linked retirement products they build do not simply track the movements of the market index, according to the chief investment officer of Legg Mason Australian Equities, Reece Birtles.

Speaking at a Legg Mason investment symposium in Melbourne, Birtles said that while the nature of building active products was primarily about beating the market index, the listed companies of that index might not appropriate for the income needs of retirees.

“Those companies [that] produce sustainable dividends and produce those dividends regardless of what the market prices do can be very different to the type of stocks within the large indexes,” he said.

“Should you own a speculative mining company? Some people might own [them] because they have very good total return prospects, but it’s not really suited to the needs of someone who is looking for a retirement income stream that’s sustainable over a ten-year period,” he said.

Fund managers need to screen the market for appropriate and inappropriate stocks, and companies with safe debt levels and low volatility to create a retirement product that is far more matched to the needs of retirees, Birtles said.

The traditional boundaries between fixed income and equities will blur as the industry focus turns to retirement income streams, Birtles said.