A new way of managing pre-retirees’ investments, dubbed “adaptive” asset allocation, may hold the key to solving Australia’s looming retirement-income problem, according to the managing director of Russell Investments, Chris Corneil.

Explaining the formation of a new multi-disciplinary team within Russell, Corneil says the traditional set-and-forget approach to asset allocation is not only outdated, but produces suboptimal investment results for investors moving from the accumulation phase to the decumulation phase of their investment lifecycles.

Nor are the existing one-size-fits-all approaches adequate, Corneil says. New solutions need to take into account each individual investor’s specific needs and circumstances.

Traditional asset-allocation responses to managing pre-retirees’ risk have involved winding back exposure to higher risk “growth” assets – such as property and equities – as retirement nears, and moving into lower risk “defensive” assets, such as bonds and cash.

Corneil says that on one hand, retirees have little or no appetite for the volatility of growth assets, but on the other hand “the low returns from cash will be inadequate to drive acceptable returns through the long years of retirement”.

The bottom line, he says, is that “individual investors will no longer accept advisers and super funds adopting a set-an-forget approach to managing their retirement portfolios”.

Corneil’s proposal of adaptive asset allocation approach involves managing an individual investor’s asset allocation according to a range of predetermined factors, including retirement date (sometimes also referred to as target date); retirement-funding requirements; and, consequently, retirement-account balances.

 Action on two fronts

“In our view there are two fronts that we need to face going forward, Corneil says.

“One is a movement towards designing solutions that are outcome-orientated. That’s what people in the street are talking about – they are talking about getting an outcome. What they are not talking about is the traditional 70-30 strategic asset allocation.

“And front number two is this massive tsunami, if you will: 5.3 million retirees in the next 10 to 15 years going into and then retiring. That’s a massive demographic shift.

“We believe the solution is going to be more dynamic asset allocation, across a wider range of asset classes, and far more activity in the portfolio, orientated around trying to solve for these two things. The solution is going to need to change.”

Corneil believes that if investors are working towards a clearly defined objective, then “things like how much risk and variability around that outcome we want to endure” become the issue.

“Compare and contrast that with what we’ve got at the moment,” he says.

“The typical balanced fund, which 80 per cent of superannuants are in today, is approximately a 70-30 mix. It’s a static asset allocation that gets rebalanced back… and whether you are 18 or 63, that’s largely what is available.”

Customised solutions for the masses

That approach worked for a long period of time. But the world has changed, he says, and so must the solutions. Providers need to develop mass-customisable solutions and that creates a significant set of business challenges.