3 minute read
A post-retirement solution designed to meet client needs
A personal finance discussion with most retirees will reveal the obvious, yet highly complex, challenges they face. How should they manage their portfolio to achieve enough income and will this income keep up with inflation? How do they protect their nest egg from major shocks to financial markets? What if they live to be a hundred? As rules-based managers at CoreShares, we’ve looked at this challenge through the lens of an evidence-based investment framework. In doing so, we’ve been able to minimise the moving parts, eliminate human error, reduce costs and offer full portfolio transparency.
To address the needs of retirees (income, inflation protection of CPI+3% and capital protection), we’ve homed in on and researched four key pieces of the portfolio puzzle: asset allocation, diversification, active stock selection where required, and how to structure the portfolio cost effectively.
Asset allocation
By analysing long-dated (100 years +) historical data, we can determine the strategic asset allocation that meets the retirement goal with the highest level of predictability.
When deliberating on whether to manage this asset allocation tactically, we looked to global research, which paints a dim view on asset managers’ forecasting and timing abilities that are vital to successful tactical asset allocation. To better understand the local scenario, we conducted research and assessed the long-term results of multi-asset funds that use tactical asset allocation. We found that, on average, these deliver worse results than an otherwise strategic asset allocation portfolio.
By using a strategic asset allocation (SAA) that is evidence-based and stress-tested, we’re able to construct a portfolio that stays aligned with the long-term client objective.
Diversification
When managing risk (capital protection), diversification is a key tool. Despite the temptation to load up solely on asset types and securities most heavily aligned with the goal of delivering income, itremains fundamentally important to ensure enough spread across geographies, asset classes and securities.
Stock selection via Smart Beta
It’s important that we look for portfolio characteristics that support the client’s goal of ensuring a growing income stream. For this reason, active managers position their ‘equity income’ stock-picking skills as a key value-add for retired clients. In reality, this approach can be implemented systemically and at much lower cost through Smart Beta.
So, the fund invests a portion of its equity using a quality dividend investment strategy known as S&P Dividend Aristocrats. The index invests in quality companies with a track record of paying and growing their dividends – which means the client’s main objective is delivered on.
We’ve been running this strategy at CoreShares since 2014, outperforming 82% of our ASISA peers on a total return basis and delivering more net income than 94% of this peer group.
Controlling for cost
Many retirees probably wish they’d heard this quote in their mid-twenties: “A person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in highcost investments” – William Sharpe.
But it’s not too late! Costs matter in post-retirement too! Because the income that clients draw is net of costs, all cost savings remain important. Put simply, lower costs mean higher value delivered to clients.
To understand the importance of costs in a portfolio’s delivery of income, we looked at the (ASISA) South African Multi-Asset Low Equity category. Here, we split the funds into quartiles based on their fees (from lowest average TER to highest average TER). Next, we looked at the actual average net income delivered in each category over a ten-year period. The data showed a direct negative relationship between fees charged and income delivered – on average, funds that cost less deliver more income.
If two funds deliver a similar gross yield of 6% p.a., and one charges a total fee of 1.55% and the other 0.5%, the client in the more expensive fund will draw an annual income of R445 000. The client paying the lower fee will receive R550 000 (both assuming a capital amount of R10 million).
By delivering our solutions at approximately 71% lower cost than the average option available in the market, we’re structurally better positioned to deliver higher income and better long-term cumulative returns.
Conclusion
The CoreShares Stable Income Fund is focussed on income generation, capital protection and inflation protection. The fund allocation is balanced between defensive assets (53%) and growth assets (47%) and aims to meet the benchmark of inflation plus 3% with a high level of probability over any three-year rolling period. The fund is suitable for living annuity investors and has a management fee of only 0.35%.
