In fact, as financial advisers know all too well, retiring Baby Boomers will need money for longer than ever before as their lifespans increase.
The traditional approaches to solving the dual needs of income and capital appreciation have their merits. But within that traditional mindset, the solution often delivered would likely be either a dividend-focused equity fund or a fixed-balanced combination of separately managed equity and fixed income funds. The limitations are clear: in the former there is potential for limited flexibility (what if high dividend paying stocks are expensive or fundamentally unattractive?), and in the latter we might find an absence of portfolio management benefit that comes from thinking across the asset class silos.
There is another way. The multi-faceted requirements of retiring investors can also be met with a multi-asset, managed solution. The benefits of this approach are significant. A holistic, single-fund approach allows for superior portfolio construction and more effective risk management. Diversification benefits are maximized and the unintended risks of combining independently managed accounts—e.g. off-setting or duplicated investments—are avoided.
So how does a multi-asset managed solution approach meet the needs of retiring Baby Boomers? By leveraging uniquely integrated equity and credit investment teams to target the preferred investor outcomes with an actively managed, cross-asset class strategy.
Another way of thinking about this is to approach fundamental analysis at an “enterprise level.” Instead of analyzing a company purely through the lens of either an equity or credit investor, a multi-asset investment team looks at the part of the capital structure that offers the most attractive risk adjusted returns.Fundamental investment views are established by estimating a company’s ability to generate future cash flows and by considering the most likely use of that cash. The latter has important and varying implications for each part of the capital structure, and with a cross asset class view it is possible to determine the most attractive way for investors to have access to those cash flows in the future.
Take Delta Airlines as an example. Airline industry consolidation has resulted in a more disciplined industry that is managing supply much more effectively. This new-found discipline coupled with improving demand has led to increased fares and significant improvement in profitability. This positive industry backdrop combined with Delta Air Lines’ strong cost management has produced significant earnings growth and balance sheet stability. From an investor’s perspective, economic exposure to such an enterprise could be desirable.
Which capital instrument is most optimal for accessing Delta Air Lines’ profitable growth? Improving profitability is positive for both equity and credit investors. However, an “enterprise investor” may also consider the valuation and what expectations are embedded in respective securities like potential upside, risk and volatility, or use of future cash flows.
An investor may conclude that future cash flows are likely to be diverted to equity holders given recent announcement of dividend initiation and stock buyback program now that the balance sheet has been repaired. Furthermore, the benefits of future profit growth will likely accrue to equity holders more so than credit holders given that equity sits at the bottom of the capital structure and thus offers the greatest risk and potential reward.
In this circumstance, a multi-asset investment manager that owns equity can access the most attractive means to gain exposure to a strong operator in an improving industry. This form of analysis is only made possible when the equity and credit analysis is conducted in a holistic context.
The concept of multi-asset investing sounds simple, but advisers helping plan sponsors monitor investments, should be aware that this approach requires a differentiated investment management culture to implement with success. A team approach is crucial to enable a level of information exchange and insight sharing to drive analysis across the asset classes, which is uncommon in the investment industry. This is not something that can be achieved overnight: a collaborative investment culture takes years to get right.
References to future returns are not promises or even estimates of actual returns that Standard Life Investments may achieve, and should not be relied upon. The forecasts contained herein are for illustrative purposes only, and are not to be relied upon as advice or interpreted as a recommendation. In addition, the forecasts are based upon subjective estimates and assumptions about circumstance and events that may not yet have taken place or may never do so.
Past performance is no guarantee of future results. This material is for informational purposes only, to provide general information to clients, and is not meant to be legal or tax advice for any particular investor, which can only be provided by qualified tax and legal counsel. This document may not be used for the purpose of an offer or solicitation in any jurisdiction, or in any circumstance in which such an offer or solicitation is unlawful or not authorized. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal, and tax professionals before making any investments.Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.