Should You Hold Cash in Your Post-Retirement Portfolio?

Old Mutual Global Investors head of multi-asset Anthony Gillham tells Emma Wall how to build an investment portfolio in retirement

Emma Wall 18 July, 2017 | 1:20PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Anthony Gillham, Co-Head of Multi-Asset for Old Mutual Global Investors.

Hello, Anthony.

Anthony Gillham: Hi, Emma.

Wall: So, I wanted to talk today about investing in retirement and I know that you run a number of strategies for this particular investor and I also know that a number of readers are in this boat. And I think a lot is written, a lot is said about investing for retirement, about getting you to that goal. But once you get there, of course, the goalposts have moved and your parameters have changed, haven't they?

Gillham: Yeah. Now, that's absolutely right and I think the timing of the question is fantastic because the FCA have just put out their first consultation in terms of the retirement outcome review and two years after the pension changes, pension freedom changes, I think that's an area that is receiving increasing focus.

Now, when we're thinking about asset allocation for customers who are looking to take an income in retirement, there are a number of really important factors that we need to consider. The first one is, we have to offer our customers an investment journey, if you like, with which they are comfortable, a smooth ride, if you like, and really trying to focus on defending on the downside.

Now, one of the – there's a couple of ways that we can do that. Strategic asset allocation is very important. So, one of the things that we've done is really focus on getting genuine diversification into our portfolios. And to us, genuine diversification, of course, means having a core of equities at the center of those portfolios. After all, we are looking to produce some growth and a core of equities I think is appropriate. It also helps us mitigate inflation risk. Equity is very, very useful.

But alongside that of course we are looking at a very broad gamut of asset classes. Fixed income, I think, remains appropriate. Government bonds get a pretty bad press, certainly, they have over this year with central banks talking about withdrawing monetary accommodation. But what I really think is, there are very few assets that offer you that genuine deflation hedge.

And so, certainly, when we look at smoothing the ride in our portfolios, that's something that we want to take account for, the fact that we can't completely discount inflation. And whilst there has been quite a bit of hubris about central banks withdrawing monetary accommodation, actually some of the inflation data looks to be turning over. And so, we need to continue to have that fixed income allocation in our portfolios.

Wall: And that stops the ride being too volatile.

Gillham: Absolutely.

Wall: But what about the risk of people withdrawing money because of course the big difference between investing in retirement versus for retirement is you're going to have to take an income. So, how do you asset-allocate to ensure that withdrawing that cash doesn't have a massive impact on the longevity of the portfolio?

Gillham: Well, there's a couple of things that we can consider. Smoothing the ride actually helps. So, dampening down those ups and downs really, kind of, desensitizes the point at which you might want to withdraw from the portfolio.

Of course, what we don't want to be encouraging our investors to do is to sell the dips. We should be buying dips. But in retirement, we need to take an income from the portfolio. So, kind of, mitigating those drawdowns, mitigating that downside is really important and diversification helps.

Liquidity is also important. So, making sure that we've got sufficient liquid assets in our portfolios is absolutely critical so that we can facilitate customers who might need to withdraw money from the fund. So, a number of different things that we can do from a strategic perspective but also a tactical perspective to make sure we've taken those factors into account.

Wall: I suppose that's a key difference, isn't it, between investing for and investing in retirement because investing for retirement, I don't think you'd ever encourage people to hold cash. But perhaps, there is a place for it in a portfolio when you're in retirement because of that liquidity desire?

Gillham: Absolutely. And liquidity needs to be something that we consider. Cash can have its own dampening effect as well. So, as I say, focusing on that smooth ride in these types of products, cash has its role to play, I would say, alongside fixed income. I mentioned the diversification benefits of government bonds, the deflation hedge, if you like.

But I'm not sitting here pounding the table for valuations in fixed income right now. So, again, in the interest of diversification we want to kind of spread amongst those assets that give us that volatility dampening effect. And so, cash can be useful from that perspective as well.

Wall: Anthony, thank you very much.

Gillham: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar