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The COVID-19-induced shutdown of the Australian economy exacerbated the downward trend of interest rates to record lows, and the downturn also had a bigger impact on company revenues, earnings and therefore dividends than any prior financial crisis. For retirees who depended on income from their investments to maintain their living standard throughout retirement, this was a dire situation.
The white paper, authored by Reece Birtles, Martin Currie Australia’s Chief Investment Officer, and Bowei (Sam) Li, Quantitative Analyst revisits the benefit of building retirement solutions with a focus on “sufficient income for life” and why a focus on equity-based investment solutions that solve for a client’s income needs are more important than ever in a post COVID-19 world.
In the paper, we show:
- There is a clear disconnect between our understanding of sufficient income for retirees’ needs, and typical defensive portfolios for retirement that are based on the total risk/total return theory.
- Our “sufficient income for life” philosophy focuses on achieving a high and stable franked dollar income stream to support annual expenses; Income growth for inflation protection; capital growth to manage longevity risk; and diversified growth exposures (across a full asset allocation) to reduce income sequencing risk.
- Instead of capital or total volatility as a standard risk measure, the concept of income stability is a better proxy for the risk of impaired living standards for retirees. This leads to a greater focus on growth assets in the retirement mix.
- Retirees require a reliable income stream to replace the wages that they had received when they were working, so it is more important to focus on the actual dollar income generated over time, rather than a headline yield percentage.
- “Sufficient income for life”-focused research and portfolio construction methodologies include: a focus on Sustainable Dividends and Quality, benchmark unaware construction, maximising franking credits, using Australian domiciled assets, structuring portfolios to be correlated with the drivers of retirement income needs, and avoiding unnecessary capital or yield impairment.
- Despite the short-term impacts of COVID-19 on the dividend paying ability for Australia companies in 2020, our specifically designed retirement income strategies have performed in line with their income objectives and that our income focus has not been compromised by the effects of 2020.
- Our research reinforces why retirement products need to be built to specifically provide retirees with the characteristics of a “sufficient income for life”.
- Our strategies are well placed to provide retirees with a “sufficient income for life” relative to income peers now and into the future, especially as inflation begins to pick up as the COVID-19 recovery continues.
Martin Currie Australia (MCA) has a long history of designing investment products that solve for a client’s income needs, or what we call a ‘sufficient income for life.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.