Traditional asset allocation won’t do
Financial advisers and their older retiree clients need to reconsider pursuing traditional approaches to asset allocation in a post-global financial crisis world, according to Legg Mason.
Speaking in Sydney yesterday, chief investment officer of Legg Mason-owned asset manager Martin Currie Australia, Reece Birtles, said the historic approach of changing a retiree's asset allocation to more defensive assets like term deposits and annuities will not work in the present world when life expectancy was high.
He said a multi-asset approach was needed to meet the longevity risk that baby boomers faced.
"A lot of people go from funds that are typically 70 per cent growth assets and 30 per cent defensive such as cash and fixed income and reverse that. They go like 80 per cent defensive assets and 20 per cent growth assets," Birtles said.
But financial advisers have to bear in mind that this will not work in a post-GFC climate in light of high government debt levels in the US, ageing populations, zero interest rate policies and quantitative easing.
"The asset class environment cannot produce sufficient levels of income from those traditional 80/20 funds to meet the needs of the retiree," Birtles said.
Birtles said an asset allocation of about 50 per cent growth and 50 per cent defensive was required to achieve inflation-like growth in an income stream in retirement.
He said retirees should balance their asset allocation between three building blocks for sufficient capital preservation, income and inflation buffer — equity income, real assets and fixed income.
"Retirees rarely take into account the income risk inherent in investing in a single asset class," Birtles said.
AUTHOR
Malavika Santhebennur
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