Emerging market equities pushed higher in August as the rest of world took a breather. In this month’s commentary, Milliman’s Joe Becker addresses the following:
• With their ninth consecutive month of positive returns, EM equities are having their best year since 2009.
• US equity market volatility was low on average, but was itself volatile, finishing the month at its highest level since May.
• The yield curve flattened as the yield on the 10-year Treasury saw its largest one-month decline since June 2016.
• Heading into 2018, a confluence of fiscal and monetary circumstances have the potential to significantly affect the supply of and demand for government bonds, and by extension, interest rates.
To learn more, download the full commentary at MRIC.com.
So far in 2017, solid equity market returns, low unemployment, a growing economy, and low inflation point toward financial and economic health and offer reasons for optimism. Other indicators, however, sit near the high or low end of their longer-term ranges. Reversion to their respective means would have significant implications for investors. In this article, Milliman’s Joe Becker offers some perspective.
Stocks are seemingly indefatigable, marking their seventh consecutive month of positive returns. In this month’s commentary we address:
• Equity market volatility exhibits an inverse relationship with stock/bond correlation. This is a benefit to managed risk funds.
• As a result of ongoing low volatility, managed risk funds have generally implemented their respective maximum equity allocations for most of 2017.
• Market-based measures of financial risks are near precrisis lows. How does a managed risk approach fit in that context?
To learn more, read Joe Becker‘s full commentary at MRIC.com.
There are clear reasons why risk tolerance drives the financial advice process. It produces a simple number, which makes it relatively easy to recommend investment products while maintaining a compliant paper trail. But such a heavy reliance on risk tolerance can also produce significant problems.
Risk tolerance is too often thought of as an unchangeable number even though there is little academic guidance on the most effective way to measure it, leading to widely varying estimates (and subsequently portfolios) between advisers.
Placing a greater emphasis on clients’ objectives and wrapping this around their risk tolerance can produce higher levels of engagement and offers a more accurate pointer to investor behaviour. Milliman’s Wade Matterson and Craig McCulloch offer some perspective in this article.
Lower investment return targets on top of higher investment risk can create disengaged investors in Australia’s superannuation industry. In this article, Milliman’s Michael Armitage offers perspective on how super funds can “pursue more innovative strategies to match risk and return to suit different groups” to meet the needs of individual investors.
Here’s an excerpt:
Older members and those with larger balances, who are more sensitive to risk (both volatility and maximum drawdown), need special attention.
Rather than automatically reduce investment return targets or increase investment risk, some funds are exploring alternative options beyond 70:30 style default funds. No single approach is perfect, but whatever strategies are chosen, they should ultimately increase the probability that members meet real (not assumed) goals.
The Future Fund may be a unique example (no members and no inflows), but it has taken a far more absolute return approach than typical super funds–even with the knowledge that government could start drawing down funds from 2020. Similarly, some super funds are taking a greater risk parity approach (that goes deeper than simply gearing up bonds) by focusing on the amount of risk in each portfolio allocation rather than the specific dollar amounts invested.
Maritime Super has also recognised the role of risk–last year, it applied a futures-based risk overlay (managed by Milliman) aimed at controlling extreme volatility and limiting capital losses to its default MySuper option. Its membership is older and has higher value balances than many other industry funds.
Other funds are now using futures to tilt their portfolio allocations based on relative valuations over the short term. This type of implementation management can potentially better manage risk and marginally improve returns.
These are just some of the innovations currently taking place as funds differentiate themselves and leave herding behaviour behind.
The ASFA Retirement Standard states that an average Australian couple requires about A$640,000 in their superannuation fund at retirement (or AUD 545,000 for a single person) to live comfortably. According to Milliman’s Jeff Gebler and Wade Matterson, “The personalised nature of each superannuation member’s retirement journey means a one-size-fits-all approach simply cannot deliver the necessary information, products, and risk management strategies required to achieve everyone’s desired outcomes.”
In the article “Why the industry’s ‘comfortable retirement’ measures are wrong,” Gebler and Matterson discuss the need for enhanced benchmarks based on available data and communication strategies to deliver better financial outcomes that individuals can live with comfortably.