Income strategies will be detrimental in the long run
Investors who rely purely on income strategies need to employ more sophisticated investment strategies to ensure they do not run out of funds during retirement, according to MLC senior investment strategist Michael Karagianis.
The strong predictable positive returns and little or no capital risk associated with income strategies has proved popular in the face of disappointing returns and the high volatility associated with traditional investment strategies since the global financial crisis (GFC).
Despite strong positive returns from income strategies since the GFC, Karagianis points to lower running yields from fixed income funds and diminished term deposit rates as evidence that returns from income strategies are on the decline.
"It is highly unlikely that strategies based on cash and bonds alone will generate sufficient returns to meet investor needs in the future," he said.
Investors are likely to continue investing in income strategies, which reflects a shift in risk preferences.
However, Karagianis said Australia's ageing population creates the need for investment strategies that have greater capital stability and create predictable retirement incomes.
While dividends and investing in credit as an asset class are becoming popular options in an Australian investor's portfolio, these need to be managed and diversified effectively in order to avoid capital shocks, he said.
Absolute return strategies may provide Australian investors with the low level of risk and high returns they seek, although returns may be lower than that of traditional investment approaches during favourable economic periods, Karagianis said.
Absolute return strategies may include "equity income" strategies which invest in higher yielding shares, but use derivative based risk management strategies or dividend stripping approaches to actively reduce the potential capital volatility associated with the underlying share investments.
Investors may also include multi-asset absolute return strategies which may aim to generate a more stable total return with less capital risk from investing in a wider range of asset classes, including alternative asset classes and by managing asset allocation more actively.
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