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It’s all in the mix

19 April 2022

We know that investors are living longer and that their retirement income may not go the distance. So, traditional strategies to manage market downside and participate in the upside have needed a rethink. It’s become the post-retirement investment sweet spot if you will.

Rafiq Taylor, Head of Implemented Consulting at Glacier Invest, offers insight into what it takes to achieve this outcome for your post-retirement clients trying to survive in tough markets.

The Secret Sauce

Let’s assume that investment professionals with clients who are already in retirement are driving a 67/33 principle – aiming to achieve 67% of market upside while managing the downside at 33%. Sustained market volatility though, makes this goal difficult, but Rafiq offers the following three-pronged approach to increase the chances of achieving it:

  1. Include traditional asset classes in the portfolio
    These are the classes that most financial advisers know and are used to. They include strategies where the criteria are absolute, as well as flexible in nature. They are able to provide downside management and, in some instances, provide the 67% up-capture that the investor is pursuing, says Rafiq. They have an absolute focus and absolute target, and they definitely contribute to the 67/33 principle.

    In the traditional space, those investors also make use of market-driven asset class strategies such as inflationary bonds, which provide a natural hedge to inflation. Other strategies could include pure equities, bonds or properties.
  2. Utilise non-traditional assets
    The big question though is: are the traditional instruments enough? Rafiq thinks not. Portfolio construction cannot be performed successfully solely on strategies that get us closest-to-perfect investment asymmetry (perfect asymmetry in investment terms would be the investment ‘nirvana’ – when 100% upside and 0% of market downside are achieved). He believes considering non-traditional strategies will become increasingly important in the future. Non-traditional assets need to be key considerations in portfolio construction. Assets such as hedge funds, smoothed funds and return enhancers are the alternative assets that will help to bring investors closer to the outcomes they desire, says Rafiq.
  3. Combining these instruments through unique portfolio construction
    If investment instruments are important, how they are combined in a portfolio, often is critical. The use of traditional approaches such as minimum variance works predominantly when trying to make the portfolio more efficient for a specific level of risk. Adjusting the methodology to take downside more explicitly into account (creating specific risk parameters in a portfolio), will help investors mitigate volatility. This gets them closer to what they are looking for in terms of their income requirements or targeted objective. This methodology, known as Condition Value at Risk (CVaR), attempts to identify the best risk-adjusted position a portfolio can have and takes into account different capital preservation parameters. CVaR is always important but even more so when investors are in the post-retirement phase of their lives.

No Silver Bullet

The world is changing, and so is portfolio construction – especially for people who are already retirees. There is no single approach that will truly achieve the outcome post-retirement investors desire, and, to this end, mixing the traditional with the modern is key to ensuring the longevity of investments.

Glacier Financial Solutions (Pty) Ltd is a licensed discretionary financial services provider, trading as Glacier Invest FSP 770.

Sanlam Multi-Manager International (Pty) Ltd is a licensed discretionary financial services provider, acting as Juristic Representative under Glacier Financial Solutions.

Sanlam Life is a Licensed Life Insurer, Financial Services and Registered Credit Provider (NCRCP43).