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For today’s soundbites, we speak with Darragh O’Dowd, head of portfolio solutions at Irish Life Investment Managers. We talked about the art of constructing meaningful retirement portfolios. And we started by askinghow longer retirements affect the planning process.

Darragh O’Dowd (DO): Our clients are living longer, and we see that. And they’re also more reliant on savings than they have been in the past. Constructing portfolios that accommodate longer retirements is about balance, in terms of the portfolio’s ability to deliver a sufficient return while also managing the potential for material losses. I think that’s important, especially given the potential impact sequencing-of-returns risk can have during the post retirement and decumulation phase. And as a portfolio manager in today’s environment, yes, this is somewhat challenging. We have low interest rates, high equity valuations, high global debt levels, and increased propensity of global governments and central banks to pursue interventionist policies. Despite these challenges, we need to make sure that the portfolios we construct are managed to deliver strong returns, to protect against potential inflation, and to deliver a sustainable income, and manage sequencing-of-returns risk for post retirements.

What he focuses on when constructing retirement portfolios.

DO: It’s important to have a diversified approach to investing. It’s important to have an eye on risk management. It’s important to have a robust strategic asset allocation framework. The right balance between active and passive management. These are the things we focus on when we’re constructing portfolios to accommodate longer retirements and lifespans.

About the target mix of equities to fixed income.

DO: I think most people would think of a 60:40 mix of equities to fixed income. That is definitely your starting point. And then it’s about tilting from that mix, to align with the investor’s risk tolerance. In Europe over the last decades, there’s definitely been a move away from traditional investment grade bonds, be it sovereign or corporate. We’ve been allocating to things like high-yield bonds, sovereign emerging market debt, and alternative credit. A step further, has been the need to supplement this with allocations outside of equities and fixed income, with allocations to alternatives and the need to focus on building some form of risk management into parts of a portfolio’s equity allocation.

What sectors he favours — and which he’s avoiding these days.

DO: Within equities, we prefer defensive allocations, strategies that provide explicit protection through the use of options, with lower allocations to pro-cyclicals like consumer discretionary, technology, and banking. And having higher allocations to sectors like utilities and pharmaceuticals that maybe have more stability in terms of their overall return profile.

What regions he likes.

DO: Emerging markets are an interesting one. In terms of equity, we would have seen emerging markets deliver quite strongly last year, and at the start of this year. We’ve seen a little bit of a pullback but, going forward, I think there’s the potential for that region to add to returns. And then there’s, you know, U.S. equities. I think it’s something that’s been helped by the ongoing stimulus. We think that’s going to add maybe half a percent to 1% to U.S. growth next year, and we definitely think that’s an attractive place to be invested.

And finally, what’s the key takeaway when it comes to retirement portfolios.

DO: I think it’s important to be disciplined, not chase returns, not overextend in terms of equity exposure. We are positive on equities going forward. Even from here, we think equity markets can deliver mid- to high-single digit returns over the next 12 months. You know possibly more if things go well. But it is likely that we will see volatility along the way. And given this, it’s important to make sure you’re invested in a diversified manner, putting together multi-asset portfolios that can deliver a sustainable outcome over the long term for retirees.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Darragh O’Dowd, head of portfolio solutions at Irish Life Investment Managers.

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