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Investing in TBC world requires attention

Building pension portfolios in the context of the $1.6 million transfer balance cap (TBC) regime is an issue advisers will need to start considering for their clients.

During a panel session at the SMSF Association National Conference 2018 in Sydney today, association head of technical Peter Hogan highlighted the issue of whether it was a good idea to build different portfolios for pension accounts, compared to accumulation accounts, for the same members or different members within the fund, and expect different results.

“This is going to become an additional question that clients will be asking so you need to think very carefully about it and how exactly you’re going to respond to it, [that is], ultimately constructing these portfolios for your clients,” Hogan warned.

“And it’s important to emphasise that we’re not just talking about clients who are limited to $1.6 million or more inside their super fund.

“This [conversation] is relevant for clients of any size who wish to start a pension because managing the TBC is a lifelong focus going forward, and just because they don’t have a cap problem now, doesn’t mean they won’t potentially have a problem sometime in the future.”

Schroders portfolio manager and senior analyst David Wanis said there were two ways both investors and advisers could navigate pension accounts in the context of the TBC.

“Putting all your chips on black or picking a number on the roulette wheel and hoping it works versus being diversified and having exposure to the broad market,” Wanis said, adding the latter was a foundation investment principle and should not be disregarded in the face of the TBC.

Dimensional executive director Nigel Stewart also underscored the importance of diversification for the TBC portion of a client’s portfolio.

“Market timing, picking sectors and trying to work out whether you should be in equities, debt or emerging markets is exceedingly difficult on a systematic basis,” Stewart said.

“What makes far more sense to me, for the clients I work with, is to be very broadly diversified – diversification is your friend and if you’re broadly diversified across equities, debt and emerging markets, et cetera, there is no question at all that you will do well.

“But the goal of the adviser should be to capture the capital market rate of return, not to speculate.”

State Street Global Advisors Asia-Pacific head of portfolio strategists Jonathan Shead said while an investment strategy was needed for the pension account, it required further considerations in order to find opportunities amid the TBC.

“However you think about growth and income – for example, long-term diversified or if you want to tilt to markets based on what’s happening, or whether you’re not diversified enough and now need to get more diversified – it’s now almost like a second dimension to the problem,” Shead said.

“We had a one dimensional problem originally: ‘Here’s what my portfolio is going to look like.’

“Now it’s a two-dimensional problem: ‘If I am going to do it differently, how am I going to do that?’”

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