Parametric de-risk plan to reach super goals


By Jerome Doraisamy

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Investors need to take a more holistic view of their management of the accumulation and retirement phases of their portfolio, where volatility can be reduced and returns still ensured, according to global asset management firm Parametric.

Speaking to financialobserver about its report, “A wide angle lens view of volatility: managing the journey and the destination”, Parametric said while volatility could not be eliminated, there were ways to mitigate it.

The research revealed “return drag” from volatility produced lower returns for investors in later stages of life compared to those whose portfolios had taken on less volatility, said director of research and after-tax solutions Raewyn Williams and managing director of investment strategy and research Tom Lee.

Superannuation fund members should not be forced to choose between a smooth journey and the erosion of retirement balances, so their equity portfolios should de-risk into defensive assets and equities that offered protection while also providing similar growth returns, it said.

“Our research argues that in addressing volatility, funds can and should do better than simply address the journey problem – they need to find solutions to address the destination problem as well,” Williams and Lee said.

Further, the emotional benefit for investors meant not having to sacrifice long-term expected returns while obtaining better downside characteristics.

“You may slightly underperform the market when markets are performing strongly, where you could potentially earn more, but that’s not such a bad outcome, because in a flat market you’ll keep pace and in a bad market you’ll outperform,” Lee said.

Williams supported this, noting research studies have consistently shown that investors feel the pain of losing money more acutely than the joys of winning.

“One of the reasons funds are trying to think about defensive equities is that investors feel the pain more than they feel the joy, and are motivated by fear and grief,” she said.

“So the question is how we can have an equities exposure that reflects that, whereby you have to give up something on the upside but it makes you happy enough so that it gives you cushioning on the downside.”

They said super funds traditionally responded to volatility by moving to a risk-adjusted investment approach, favoured innately defensive equities portfolios, purchased downside or tail-risk protection, and adopted volatility dampening strategies.

These approaches, however, affect a member’s retirement balance, Williams and Lee said.

“Either the portfolio continues to live with significant volatility and the volatility drag returns, or it costs so much to reduce the volatility that the members’ returns will be even lower than if the portfolio experienced the full volatility drag,” they said.

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