DateJuly 5, 2019
CategoryLonsec Retirement Perspectives
With the Reserve Bank of Australia (RBA) cutting the official cash rate to just 1.00% on 2 July, retirees and investors face increased challenges in deriving enough income from their investments to meet their needs. This is an ongoing issue with more interest rate cuts forecast by financial markets. The following chart puts this challenge in perspective.
Source: Reserve Bank of Australia, June 2019
Lonsec’s Retirement Lifestyle Portfolios are objectives-based portfolios focused on delivering a sustainable level of income in retirement, as well as generating capital growth. Specifically, the portfolios are designed to assist advisers in constructing portfolios to meet retiree essential and discretionary income needs, while generating some capital growth to meet lifestyle goals.
Differences to Lonsec’s core accumulation model portfolios are:
With 10 year Australian government bond yields currently less than 1.50% p.a., Lonsec has opted for a diversified approach to meeting this income objective. Income in these portfolios is generated by the following funds:
|Legg Mason Martin Currie Real Income Fund
|A portfolio of listed companies that own ‘hard’ physical assets, like property, utilities and infrastructure (e.g. A-REITs, airports, toll roads, electricity and gas grids). Real Asset companies like these are an integral part of everyday life and are often monopolistic in nature. Their demand profile is, therefore, relatively inelastic and not pegged to the business cycle, hence these companies have more predictable free cash flow and dividends. The typically long-term nature of their cash flows (underpinned by long term contracts and favourable regulatory structures) also offers protection during market downturns, as well as upside growth potential from population growth. This means Real Asset companies typically have a low beta versus the broader equity market and can provide low-volatility, regular and dependable income streams.|
|Plato Australian Share Income Fund
|A tax effective, income focused, ‘style neutral’ Australian equity portfolio that is broadly diversified (50-120 stocks) and seeks to generate income through investing in fully franked dividend yielding stocks in the run-up period to the ex-dividend dates. The Fund has been specifically designed to be tax effective in the hands of a 0% rate tax payer by capturing franking credits and exhibits a high portfolio turnover (circa 150% p.a.).|
|IML Equity Income Fund
|An equity income strategy that seeks to generate income through investing in dividend yielding stocks and an options strategy. The options strategy generates income through buy-write and covered call option strategies and selling put options.|
|Grant Samuel Epoch Global Equity Shareholder Yield Fund
|A long-only, benchmark unaware product that aims to invest in global companies assessed as generating free cash flow which supports both a sustainable ‘shareholder yield’ and some cash flow growth. Its objective is to generate a target return of 9% p.a. or greater over ‘a full market cycle’, expected to be derived from dividends (4.5%), share buy-backs and debt pay downs (1.5%) and cash flow growth (3%).|
|Talaria Global Equity Fund
|An active long-only, ‘benchmark unaware’ investment product that invests in large cap securities within developed and emerging markets. The Fund is relatively concentrated, targeting 25-40 ‘quality’ companies that are purchased at ‘reasonable’ valuations. Approximately 50-70% of the Fund is committed to equities, with the residual reserved as option cover for put options sold. Stock positions are entered (and exited) via the sale of fully cash backed (covered call/put) stock options. The option premium earned provides an additional source of return beyond capital growth and dividends and creates a ‘buffer’ against losses by reducing the cost of stocks purchased.|
|Fixed Income Funds|
|Schroder Fixed Income Fund||A Diversified Fixed Interest product normally invested in Australian and global (hedged) government and non-government debt markets and may have material exposure to credit assets, including up to 20% sub-investment grade sectors.|
|PIMCO Global Bond Fund
|A Global Fixed Interest fund normally invested in a mix of bonds paying fixed rate (predominantly) coupons such as those issued by sovereign governments, corporations and other structured securities like mortgage bonds. Lonsec notes that PIMCO’s total return approach implies a degree of indifference as to the source of returns either from income / distributions (e.g. coupons) or growth (e.g. asset price growth).|
|Janus Henderson Tactical Income Fund
|The Fund will normally be invested in a mix of bonds or debt securities paying fixed and/or floating rate coupons issued by Australian governments and corporates, residential mortgage backed securities and hybrid securities. The Fund is designed to actively allocate between Australian cash, Australian fixed interest and Australian credit, providing greater scope than traditional bond funds to protect capital in a rising yield environment.|
|Macquarie Income Opportunities Fund||A relatively conservative credit fund with short duration fund which uses a core/satellite approach and distributes income monthly. The ‘core’ is a portfolio of predominantly ‘investment grade’ floating rate securities and ‘satellites’ exposures of Global High Yield and Emerging Markets Debt.|
These funds provide a diverse source of income for retirees, though this does not come without risk. With equities generating a significant portion of the income it is imperative that equity market risk is managed through allocating to more traditional fixed income funds and funds able to play a Risk Control role in the portfolios.
03 9623 6373
30 May 2019 - For many, approaching retirement is often characterised by heightened emotion and anxiety associated with competing life goals and financial objectives. Each ...
11 Mar 2019 - “How much can I spend?” This question lies at the heart of so many conversations between a retiree and their adviser. Although not explicitly stated, this ...
11 Mar 2018 - In recognition of the growing challenges facing retirees, Lonsec has published a paper on the role annuities can play in retirement portfolios. The paper ...