Not all investors are suited to a traditional 60/40 portfolio, particularly when in retirement phase. Frank Danieli (MA Financial Group), Darren Beesley (Evidentia Group), and Daniel Stojanovski (Ventura Funds Management) explore the difficulties in constructing retirement portfolios for clients who have objectives that sit outside the conventional 60/40 framework

For investors in retirement phase, advice and investing frameworks around retirement income is particularly important.

It’s an area that advisers are increasingly focusing on in their discussions with clients, says Daniel Stojanovski — Chief Investment Officer at Ventura Funds Management and Asset Consultant to Centrepoint Alliance.

“I believe there are four key areas within a retirement income framework that advisers need to be aware of,” he says.

“Firstly, retirement portfolios are very different to wealth accumulation portfolios.

Secondly, retirement portfolios need to be highly targeted in how assets and investments are allocated, which includes looking closely at the risks of the underlying assets."

“The third key area is that retirement portfolios also need to have a framework focused on retirement income. This requires careful consideration of core and satellite investments, as well as ‘bolt-on’ products, like annuities. This type of framework helps to provide better solutions for clients.

“And fourthly, from a retirement perspective, retirement portfolios need to have a clear investment philosophy, particularly around income generation, capital preservation, the needs of the client, and the overall investment objectives advisers are trying to achieve for their clients.”

Speaking on the topic of ‘Retirement income’ as part of an IMAP webinar series titled ‘Beyond 60:40 — Delivering portfolios for clients with different goals’, Darren Beesley — Head of Portfolio Management, Multi Asset at Evidentia Group — believes there are three broad ways portfolio construction can be adjusted and improved from the traditional 60/40 portfolio to enhance the overall retirement income outcomes for clients.

1. Know what you’re doing: Darren agrees that the first way to improve a retirement portfolio is to properly understand what you are doing in the actual portfolio and the outcomes you’re trying to achieve.

This means looking closely at the attributes and characteristics of the investments within a product from a retiree’s perspective.

“Unlike wealth accumulators, retirees generally have a preference for less downside risk, because they face sequencing risk and have limited capacity to replace capital,” he says.

“They might prefer franked income, because they have a different tax status, or they might prefer inflation-linked securities to ensure the real value of their investments remain consistent, even with inflation.”

However, Darren adds that with a managed fund, where investors are unit holders, there’s no ability to customise the product, meaning every investor receives the same journey and experience with their investments.

He says this is something advisers need to be mindful of when constructing retirement portfolios.

2. A layered strategy: Darren believes it’s important for advisers to look at portfolio construction at an individual investor level by providing a layered strategy that encompasses various products, which, unlike investing in a fund, helps customise the approach to the individual needs of clients.

“When you consider key factors like a client’s drawdown rate, their age, and access to Government entitlements, like the Age Pension, you need to think about whether you can deliver their financial goals by providing a different set or layering of products, compared to using one product that is exactly the same as the one being used by the person next to them.

This is the approach we take to retirement investing at Evidentia, which we call — ‘strategic advice’,” says Darren.

At Evidentia, advisers consider the various elements of strategic advice that take into account each retiree’s individual circumstances, such as their goals and objectives. By doing so, it seeks to ensure that the strategy picked for clients is delivering the highest probability of achieving their goals.

To assist advisers with this strategic advice, Evidentia has built a range of tools, including a retirement simulator, that models the client’s financial situation, along with their investment goals, to reach a set of probable outcomes for the client.

“We take a more scientific approach to strategic advice,” says Darren. “We take the client’s existing assets, their financial goals and spending patterns, and we simulate that 5,000 times across various scenarios and assumptions (such as, longevity, return, and market volatility).

These scenarios range from retiring at a bad sequencing event (such as a GFC-type scenario) to living to 110-years-old (triggering a longevity event).

“Once we have simulated a strategy 5,000 times, we might then overlay a strategy, for example, that incorporates illiquid investments to assess the liquidity outcome.

We test strategy after strategy and across different scenarios to determine the optimal strategy that is most likely to achieve the client’s financial goals, given their starting position.”  

3. Strategy-based investing: Darren believes strategy-based investing is where the industry is heading towards.

He explains that when you develop the strategic advice, which may include a layering of products, strategy-based investing then aims to plug each of these products into sleeves that when layered together, forms a strategy that is tailored for individual clients.

Essentially, this enables a portfolio to be built by using a number of underlying strategies that are customised for the specific needs of the client.

“Just as advisers must recognise their clients’ uniqueness when providing financial advice, Evidentia builds portfolios specifically around advice strategies,” says Darren.

“We collaborate with advice firms to build their own tailored set of portfolios covering strategies such as: asset liability matching for retirees needing income, and gearing for younger clients accumulating wealth."

“Increasingly, we’re aiming to deliver portfolios that fit into a strategic advice framework for advisers.By using this framework and our strategic advice tools, advisers are able to use this sophisticated modelling that takes into account their client’s individual circumstances and goals, to deliver an optimised outcome for clients, emphasises Darren.”  

According to Frank Danieli — Managing Director and Head of Global Credit Solutions at MA Financial Group — most investors think about the classic 60/40 portfolio comprising of stocks for growth and bonds for defensiveness of the portfolio. But he challenges the traditional model by asking: ‘What happens if alternatives are added to the mix?’

Frank refers to industry research that shows over a 33-year time horizon, the inclusion of alternatives to a portfolio provides a pick-up in return of about 50bps. But he believes the key consideration for adding alternatives to a portfolio is the decline in overall volatility they bring to the portfolio. “Over this period, just by adding alternatives, you get a 20 per cent decline in volatility in the portfolio. This is particularly relevant for clients in the retirement income phase,” he says.

But how can adding alternatives deliver this type of outcome?

“It’s a good question,” says Frank. “The traditional asset classes in a portfolio are in public markets, but they have increasingly become driven by ‘passive money’. Passive money — which requires little ongoing time and effort to earn — is not fundamentally orientated. Instead, it tends to be more about sentiment, such as people allocating in a broad-based way, like risk-on or risk-off.

‘Risk-on’ and ‘risk-off’ describe the market’s overall sentiment towards risk and investment. A ‘risk-on’ environment indicates a positive market mood, with investors eager to take on higher-risk assets for potential gains. Conversely, a ‘risk-off’ environment signifies a pessimistic mood, prompting investors to seek safer investments to protect their capital. 

“Forty-four per cent of the global equities market is driven by passive money, and this figure continues to grow. Even looking at fixed income, back in the year 2000, the amount of passive money was only 2 per cent but in 2024, that has increased to 30 per cent. This wave of passive money is making markets less efficient and more volatile.” 

Frank refers to a study from the University of Minnesota in 2022, which found that the effect of adding significant amounts of passive money into a financial system means you lose elasticity in pricing.

Effectively, there are less marginal buyers of assets to bring prices closer to their fundamental value, which creates more volatility. This means we’re seeing more volatility in public markets, which is particularly relevant for clients in retirement phase, who generally have less tolerance for volatility.  

According to Frank, alternatives are ideal for reducing the overall volatility within a portfolio, while enhancing returns. He adds that when investing in alternatives, an important consideration for retirement portfolios is what you’re actually holding.

Frank believes alternatives encompass a wide universe with varying characteristics, and shouldn’t be simply pigeoned-holed as a high risk investment.

“When using alternatives in a portfolio, it’s about substituting one asset for another that has a similar but different type of characteristic, which brings benefits and trade-offs,” says Frank. “So, in a traditional 60/40 portfolio, if you were to substitute bonds for private credit (an alternative), you’re not essentially changing the nature of what you’re doing.

That’s because a bond is a loan to a company and private credit is a private loan to a company or asset. However, because alternatives are less liquid, you’re giving up some liquidity when using these assets.”

He says it’s the same with the growth component of a portfolio. Stocks (public equity) provide the investor with an ownership interest in a company, while private equity provides ownership of the whole company, although it’s less liquid compared to a publicly listed equity.

“In a world of high volatility, driven by passive money, adding some alternatives to your portfolio,  where you give up some liquidity, means you can rely more on investment fundamentals, like the earning power of the business, and the ability of the business to provide cashflows and dividends,” says Frank.

“That’s how I think alternatives should fit into a portfolio. It’s a type of asset class that can deliver a substitution for growth or defensiveness. By trading-off some liquidity, an allocation to alternatives does provide retirees with definite advantages within their portfolios.”