Retirement Portfolio Resilience Perspective
Primary Pillar: Retirement Portfolio Construction
Supporting Pillars: Risk Pricing Discipline • Resilience Across Market Environments
This early edition of Gyrations examines how changing market conditions influence portfolio construction and explains why investors may benefit from broadening the range of portfolio construction approaches beyond traditional income and growth asset allocation.
Viewed through today's Retirement Portfolio Resilience Framework, the enduring principle is that retirement portfolio construction should evolve with changing market conditions while remaining focused on reducing dependence on favourable market outcomes. The publication recognises that both traditional income and growth assets have structural limitations under certain market conditions and proposes complementary portfolio construction approaches that combine long-term growth participation with resilient downside protection. While the terminology reflects the investment environment of 2016, the underlying architectural philosophy remains central to the evolution of Retirement Portfolio Resilience.
This publication forms part of Gyrostat's historical research archive documenting the evolution of the Retirement Portfolio Resilience Framework.
In this fortnightly report we provide insights into risk management of an equity portfolio.
- Global macro conditions (in pictures) with key upcoming data release with market pricing of outcomes based upon the flow of money (where available)
Our investment view is that interest rates will stay low for an extended period, and stock market volatility will increase. During 2012-2015 the level of volatility was low by historical standards. Our expectation is that volatility will increase, leading to “risk-on”, “risk-off” investing market characteristics only distantly related to fundamentals. Volatility has started to increase in 2016.
With this view, there is a need to expand the range of ‘income’ assets to include risk managed equity funds. Re-allocating ‘income’ to ‘growth’ assets in search of higher returns exposes investors to substantial fluctuations in capital value.
The ideal solution is to buy blue chip shares with insurance resulting in a “hockey stick” payoff always in place – always participate in the upside with minimal capital at risk. This delivers higher income while always protecting and growing the investors’ capital. This forms part of an ‘income’ allocation of a portfolio and is suitable for all investors.
