The issue of drawdowns during pre-retirement and pension phase needs greater attention, though investors are beginning to better acknowledge the risks, according to Lazard Asset Management.
“The stats show that a lot of people in SMSFs want to have a lot of control so there’s no doubt that they like their direct stocks,” Lazard Asset Management portfolio manager Aaron Binsted told selfmanagedsuper.
“But what we’ve identified recently is that the whole concept of identifying when valuations are high to minimise drawdown risks is getting traction.
“That, to me, is where people perhaps recognise a manager can add value.”
Commenting on investors’ focus on income for retirement, Binsted said the manager’s view is to have both drawdown risks and income top of mind.
“The problem is that it does not make sense to always be fully invested. We think that’s the biggest fallacy with a lot of the income approaches and that just exposes you to a lot of capital losses and dividend cuts,” he noted.
“So we agree income is important and it is one of the objectives [for retirement], but it shouldn’t be about keeping income high when it puts you at risk of larger capital losses.”
He said avoiding and limiting drawdowns has been a key area of focus this year.
“We think markets generally, around the world, are looking quite stretched and overvalued at the moment,” he noted.
“If someone is saving for retirement and they experience a drawdown at 59 and want to retire at 65, the difference between a 10 per cent and a 30 per cent drawdown can be up to six years of pension income. So it’s a material difference.”
The Lazard Defensive Australian Equity Fund specifically targets pre-retirees and pension-phase investors.
“At the moment, the fund is about 35 per cent cash, which means we have a lower spot yield than peers, but once we explain to investors it’s because valuations are high and we’re protecting them from downside, they understand the argument,” Binsted said.
“The practical outcome has been that in the six-and-a-half years we’ve been running money in this fund, in negative months on the Australian Securities Exchange, the fund has only had half of the drawdown of the general markets.
“Also, when looking at the length and depth of drawdown, the fund has had much lower maximum drawdown in negative events and also has recovered its value much quicker than the general market.
“This goes right to the core of the issue of limiting drawdown for investors.”
The minimum investment for the fund is $20,000.