State Street Global Advisors yesterday launched a series of retirement strategies for Australian retail investors and is already mulling offering similar schemes in Asia.
These funds are the first of their kind for the firm, and while SSgA has already had early-stage conversations with one Asian firm, it will likely introduce similar products in the US and Europe first, as these markets are more developed.
“Interestingly we had an inquiry from a defined contribution plan in Asia,” says Mark Wills, Asia-Pacific head of SSgA's investment solutions group based in Sydney. “They have a series of different schemes, one of which is a retirement option, [and] we've started talking to them about the core investment processes used in these strategies.”
As DC plans in Asia are still at an early stage, stand-alone retirement strategies for local investors probably won’t emerge for five years or more, suggests Wills, but SSgA will continue to talk to plan sponsors in the region.
SSgA, with $2.1 trillion in AUM globally, filed the prospectus for the new funds with the Australian Securities and Investments Commission yesterday, having worked on the products for two years.
The three strategies will initially be offered to Australian retail investors via local investment platform Netwealth Investments from mid-October, although SSgA is in discussions with other platform providers in Australia to expand the distribution of the funds.
SSgA will also partner with investors looking to implement its three core investment processes into their own model portfolios, investment products and superannuation offerings. Potential partners include superannuation funds, multi-managers and other investment platforms.
They comprise the SSgA Retirement Lifestyle Builder, aimed at the working years leading up to retirement; the SSgA Retirement Lifestyle Sustainer, for retired investors aged up to 80; and the SSgA Retirement Lifestyle Provider, for the years after 80.
The Builder strategy targets capital growth of Consumer Price Index +5%; the Sustainer aims for capital growth of slightly over CPI, plus a consistent income of just over the Reserve Bank of Australia cash rate, and the Provider targets a steady income of RBA cash +2-3%.
These strategies differ from target date funds (TDFs), which tend to focus on the accumulation phase leading up to retirement. SSgA’s schemes are geared for the years immediately before retirement and during retirement itself.
“While many of the TDFs do fine in accumulation, as we shift into retirement there’s a whole other perspective that needs to be taken into account,” says Dan Farley, global chief investment officer of the investment solutions group, based in Boston. “Investing for the long term is less important.
"These portfolios require withdrawals to be considered, as opposed to just contributions," he adds. "That’s a big difference. And we wanted to build a series of portfolios for that purpose, to target retirees.”
Australia's mandatory pension scheme, which holds some A$1.5 trillion ($1.4 trillion) in total retirement savings, is considered the most advanced in the world. After five years of extreme performance volatility, the average individual’s retirement pool still increased by 14.7% in the past financial year.
In general, wealth construction portfolios and traditional asset allocation schemes “work reasonably well”, says Wills, but there is always the risk that a severe market event like the global financial crisis can wipe out up to a quarter of a retirement nest egg.
“It’s called ‘sequencing risk’, and it’s been highlighted by the 2008/2009 financial crisis,” Wills says. “If someone retired just before, during or just after the crisis, their balance would have been reduced by 25%.”
As such, long-term static asset allocation is no longer the best way to manage one's investment immediately before and during retirement, argues Farley. As such, the SSgA funds are an attractive option for Australian retail investors, he says.
They will use three core investment processes: strategic asset allocation with investments selected based on capital preservation, regular and stable income, inflation offset, capital growth and/or drawdown mitigation; dynamic asset allocation, which adapts to changing market conditions; and an equity protection overlay via a futures-based programme aimed to reduce equity exposure in high volatility markets.