The average KiwiSaver asset allocation would fail to deliver an adequate return for most members, Erik Ristuben, Russell Investments chief investment strategist, told a New Zealand audience last week.
Ristuben, speaking a the Auckland Russell Investments conference, said with KiwiSaver assets split roughly 50/50 between income and growth assets, the expected long-term return would barely nudge above 5 per cent.
He said based on current valuations, the expected long-term return of portfolio weighted 60/40 in favour of growth assets (typical of US retirement default funds) would hit about 5.6 per cent per annum.
The average KiwiSaver asset allocation would see even lower returns using the same assumptions.
“But many investors still need about a 7 per cent long term return to fund their retirement,” Ristuben said. “You need to a lot to move from 5.6 to 7.”
While one solution to the retirement funding gap would be to load up on equities, he said most investors would find the experience too “visceral”.
“Behaviourally, most people can’t survive [equity volatility] and will give up to the ‘capitulation trade’,” Ristuben said. “Diversification can make that ride a little smoother, it can help manage that natural behaviour.”
However, he said in the current low-return environment there were several factors investors could not do, including:
- Ignore investment strategies that may offer incremental returns;
- Take risks they do not expect to get paid for; and,
- Ignore implementation efficiency.
“The evolution of the Russell investment process is framed on this issue,” Ristuben said. “Every investment strategy has to be intentional, informed and efficient.”
In a practical sense that has seen Russell focus on a number of approaches including: expanding the role of active management; exploring dynamic active asset allocation; utilising “value conditional” strategic asset allocation – essentially, multi-asset investing; targeting the illiquidity premium, and; leverage.
He said the industry had to do a better job of explaining risk to investors, especially where the biggest risk they face is not achieving retirement outcomes.
“Every investment strategy is hard to own at some point in the cycle,” Ristuben said. “We have to make that risk as easy as possible to explain to investors… to give them outcomes at the level of risk they can survive.”