Harbour Investment Management - Rolling Stones vs The Beatles

We reproduce a rather clever and well written newletter we've received from Shane Solly - Portfolio Manager at Harbour Asset Management.

Harbour Asset Management offer a range of retail funds. To find out which ones might be appropriate for you call Bay Financial Partners on 07 578 3863.

Generating a consistent regular income stream from a retirement nest egg without taking some degree of risk is difficult in the current low interest rate environment. Income returns on fixed interest and other lower risk income assets have been driven to intergenerational lows as central banks globally have flooded markets with liquidity via Quantitative Easing and other monetary policy programmes.

As income yields have fallen, investors have moved into low volatility equity (also known as stocks or shares) funds and high dividend equity funds to increase income generation. Some of these strategies are now crowded, with rapid growth in fund size over the last twelve months.

But a key question for people entering retirement is whether their investment nest egg can withstand equity market swings and keep them in the "hand bags and glad rags" (one of Manfred Mann's finest) they are accustomed to?

When the baby boomers were born in the 1950's average life expectancy was approximately 65 years old. Given lifestyle changes and medical advancements, actual boomer life expectancy is likely to be into the 80's. This means some boomers may have 15-20 years of post-retirement living to fund. Boomers will need some growth assets to maintain wealth and grow purchasing power over this period of time.

But investing in equities may be volatile. This means the range of return outcomes can be much wider for equities than say fixed interest returns in the short term. Some of this volatility is explained by uncertainty, which is defined as people's inability to forecast the likelihood of events happening. Currently the high level of uncertainty about future global growth outcomes and global economic policy settings has resulted in a pullback in equity markets globally.

Boomers may need to focus on the medium term and hang onto equity investments (possibly even buying more) rather than selling out at the worst times. A good example is the 2008 -2009 global financial crisis (GFC) period. If investors had sold their stock investments in 2008 they may still be struggling to get their equity investments back to where they were before the crash. But if they had held on, they may have a greater capital pool than they had before the crash. The US S&P 500 stock index peaked at 1,557 in 2007 before the market collapsed to a low of 683 in 2009. But now, even with increased uncertainty, the S&P 500 is around 1,920. That's 23% higher than the 2007 peak and more than 280% higher than the market bottom.

If boomers stay the course and keep their targeted exposure to growth assets, the 15 -20 years post retirement period may provide an adequate period of time to withstand most periods of elevated volatility or poor equity market returns.

Investing in a diversified portfolio of quality companies may help when making a medium term equity market investments. Research by Harbour Asset Management suggests that high quality stocks ride through the good times and provide relative protection in the weaker times.

The baby boomer generation has seen fads come and go. In the near term they may need to think differently about how they structure their investments for post-retirement wealth realisation. They may need to rely less on fixed interest assets to generate regular income streams, and use some growth assets such as equities to help create an income stream that meets their needs by regularly selling portions of their wealth pool. But to do this boomers may need to be patient and focus on a diversified portfolio of quality stocks.

The process of unwinding of unusually supportive monetary policy settings may contribute to swings in sentiment and market declines. Such declines may represent an opportunity for patient baby boomers who need a mix of growth and yield to support their lifestyles over the next twenty years.

Perhaps a better music reference for investing baby boomers is "Time is on my side". It certainly seems to be working for the Rolling Stones!

5 October 2015

Shane Solly
Director, Portfolio Manager
Harbour Asset Management