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Ideal for Living Annuities

In this article we discuss how the construction of the Glacier Invest Real Income Solutions for Living Annuities make them ideal for post-retirement clients who draw an income from their investments. We’ll show you where these solutions fit into our holistic discretionary fund management (DFM) offering – a comprehensive offering that covers the needs of a wide range of clients across a variety of life stages and risk profiles, providing you with the means to meet the needs of a diverse client base.

Where do the Glacier Invest Real Income solutions fit into the bigger picture?

The Glacier Invest Real Income Solutions are specifically created for clients with living annuities and are therefore specialist retirement income portfolios. Below is a graphical depiction of clients’ investment life stages and the corresponding return requirements and portfolio construction techniques.

It is important to note a few key points:

First, take note of the suggestion that clients in their 20s, 30s and 40s should invest in fairly aggressive and high growth investment portfolios, assuming they have the risk tolerance for that. As clients start moving into their fifties, it may be prudent to move them into more moderate or medium growth and medium risk portfolios, to start focusing more on preserving wealth for their retirement. These life stages are covered by the range of portfolios we manage in collaboration with financial intermediaries through our investment consulting services and the regular investment committee meetings we have with financial intermediaries.

We suggest that retired clients should move into specialist retirement income portfolios, designed to be specifically for this part of a client’s investment lifecycle: The Glacier Invest Real Income Solutions.

The bottom row of the table above is labelled “Portfolio construction technique”. You will note that we use a construction technique called Mean Variance Optimisation (MVO), for pre-retirement portfolios, but the technique changes to the Conditional Value at Risk Optimisation Approach (CVaR) after retirement. This is the technique used for the Glacier Invest Real Income Solutions.

The link between asset allocation and portfolio optimisation

Why a change in the portfolio construction approach is so important when designing and managing retirement income portfolios

Asset allocation is of course the process of dividing investments among different kinds of asset classes such as equities, bonds, property, cash, etc. The aim is to achieve the best combination of asset classes that will lead to risk and reward outcomes consistent with an investor's specific situation and goals.

And portfolio construction is the process of assigning a weighting to each chosen asset class and choosing the appropriate investment funds within each asset class to underlie the portfolio, so investors get the best possible return for a given level of risk.

The portfolio construction process consists of three general steps:

  1. In the first step we choose the type of optimisation algorithm to use, depending on what we are trying to achieve. For example, if we’re designing a portfolio for the accumulation phase of a client’s investment lifecycle, we use MVO, as mentioned. And if we’re designing a portfolio for the decumulation phase, during which a living annuity client will be drawing income from their investment, we use the CVaR approach.

  2. In the second step we model the forward-looking assumptions for each asset class in terms of projected return and risk, as well as co-movements or correlations among the asset classes.

  3. In the third step we run the chosen optimisation algorithm which generates percentage allocations to the different asset classes, to create the most efficient asset allocation.

Why use different portfolio construction approaches during different phases?

The difference between the two optimisation approaches is that MVO focuses on reducing overall volatility, in other words the standard deviation of the portfolio, whereas CVaR focuses on managing downside risk.

Portfolio volatility has a much greater negative impact on a post-retirement portfolio from which a client is drawing income, than on a portfolio in which a client is accumulating assets pre-retirement. To demonstrate, let’s refer to the diagrams below.