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Higher life expectancy changes retirement planning
With healthcare advancements targeting prolonged lifespans a change in retirement planning is unavoidable. Newton (BNY Mellon IM) multi-asset manager Paul Flood outlines his argument for greater stability and diversity of income in retirement.
Active and longer lives in retirement mean investors are looking for greater stability of income as well as an increased diversification of sources, according to Paul Flood, manager of Newton Multi-Asset Income. At the moment, in the UK, the life expectancy of a man is 80 years but only 63 of those years are expected to be in good health, Flood notes. Genomics and targeted healthcare developments aimed at reducing disease meaning we could live a longer, healthier old age all of which changes the way we have traditionally looked at retirement.
Flood notes that if you look at Japan, older populations tend to work a lot longer sometimes as long as into their 80s or 90s. This may be part-time work but they are doing something, wanting to feel they are contributing to society, they're not just being written off, he says.
Less income more risk
As a result, Flood says, as people go into retirement, they will likely care more about how their income is delivered and the volatility of that income, rather than volatility of capital. "We believe people will care more about a stable and growing sustainable income, having the same monthly income or the same annual income each year, and focusing on the fact that they dont want it to go down rather than thinking about relative returns. As such we think it is important to diversify the sources of income and look for those that have a low sensitivity to the economic cycle."
As a result, Flood says, as people go into retirement, they will likely care more about how their income is delivered and the volatility of that income, rather than volatility of capital. "We believe people will care more about a stable and growing sustainable income, having the same monthly income or the same annual income each year, and focusing on the fact that they dont want it to go down rather than thinking about relative returns. As such we think it is important to diversify the sources of income and look for those that have a low sensitivity to the economic cycle."
Flood points out the traditional investment staple in retirement, fixed income, has yielded less and less with a greater level of risk, hampering the retirement income generation. "The investment grade bond market in Europe delivers a yield of less than 1%. It doesn't even protect you against the ravages of inflation at its current level. In the high yield bond market in Europe you get just over 3% at the moment, so you're not even being adequately compensated for the increased risk of default." But Flood says it is not all bad news.
Alternative markets as a solution
In replacing the role bonds traditionally played in multi-asset portfolios, Flood says he has turned to the alternatives market: assets such as renewables, aviation finance and infrastructure. According to him, these have very little sensitivity to the economic cycle and tend to have inflation-linked revenue streams.
In replacing the role bonds traditionally played in multi-asset portfolios, Flood says he has turned to the alternatives market: assets such as renewables, aviation finance and infrastructure. According to him, these have very little sensitivity to the economic cycle and tend to have inflation-linked revenue streams.
He cites opportunities in companies such as Greencoat UK Wind, a portfolio of wind farms across the UK. "What we like about this company is 50% to 60% of the revenue streams come from government subsidies, which are fixed and inflation-linked. So there is no sensitivity to the economic cycle, unlike equity earnings and corporate bonds. The other 40% comes from the power price and we don't turn the lights and the heating off just because we're going through a recession."
The semiconductor sector is another, increasingly important, area that Flood is looking at. The decarbonisation of our energy streams and our electricity is driving more and more demand for renewable energy sources, he notes. "To get that electricity from offshore wind farms we need high powered energy management systems that use sophisticated electronics and semiconductor chips." Renewables currently make up some 9% of his multi-asset income portfolio, while infrastructure makes up some 7%.
