Parametric unveils defensive CIPR strategy

04-Dec-2015

By Sarah Kendell

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Global asset manager Parametric has launched a risk management strategy for international equities portfolios that it says could be key to meeting superannuation fund needs following the comprehensive income product for retirement (CIPR) legislation due next year.

Speaking to financialobserver, Parametric director of research and after-tax solutions Raewyn Williams said the group would make the strategy available to Australian investors following positive local super fund feedback after initial meetings in October.

“We had our US manager come out and have some discussions with funds, and we got really positive feedback that they wanted to hear more,” Williams said.

“More super funds are needing this type of strategy but they don’t have much of an experience in it, so there is a lot of educating of the market needed.”

The strategy, which has proved successful with US investors in the pension phase, uses put and call options to lessen volatility across a portfolio of both S&P 500 stocks and a global stock portfolio mirroring the MSCI ACWI index.

Williams said the approach differed from existing income-focused retirement funds in that it addressed the “triangle of needs” for retirees – income, risk management and flexibility – as outlined in the Financial System Inquiry report, making it ideal for use in a CIPR.

“There’s a specific need to deal with risk management without going overboard in terms of unduly compromising the income and flexibility needs of retirees,” she said.

The use of options would generate additional premium income and cost less than other forms of capital protection like derivatives, while also ensuring liquidity – a key reason why the strategy was not yet appropriate for an Australian share portfolio.

“We would look at doing an Australian version of the strategy, but the issue is there isn’t a lot of liquidity in the Australian options market at the moment,” Williams said.

“We think the local options market would have to fire up a bit more for it to be feasible.”

While the global equities portfolio was new to market, Williams said the more established S&P 500 portfolio had performed strongly in line with the group’s projections.

“We’ve had performance that is showing the back tests we’ve provided in our research is playing out,” she said.

“We’ve seen volatility reduced by about 40 per cent compared to an equity index, and we’re seeing an income pick-up from the premium generation of about 3.8 per cent annually, so what we saw in the back test is playing out in practice.”

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