Mr Richards said investors need to maintain “a substantial exposure to equities in order to produce the kind of returns needed to fund a dignified retirement, but they also needed to be able to manage the risks”. 

“This is especially true if you consider that people are living longer and will increasingly need that exposure to growth assets to see them through their retirement,” he said.

Sequencing risk was overshadowed by threats like the GFC but could be much more devastating in the long term, said Mr Richards.

“People approaching retirement are really facing a sequencing risk lottery,” he said.

According to Ability Capital, sequencing risk can result in a difference in account balances of up to $1 million by the age of 70, even though returns for each member may be similar. 

Analysis conducted by Ability Capital in a recent white paper indicated, however,  when a downside protection strategy is applied appropriately, a superannuation member is four times more likely to achieve a $500,000 balance by age 70. 

The research found that even when equities experience a prolonged period of low returns, the investor is still more than twice as likely to reach $500,000 compared to adopting a passive equity strategy. 

“The new approach in this paper gets us much closer to the investment ‘El Dorado’ of higher returns with low volatility and low sequencing risk,” said Mr Richards. 

Future Fund director of alternatives and fixed interest Ben Samlid said the strategy was innovative and could be useful not just for institutional superannuation portfolios but for endowments, private ancillary funds, and SMSFs as well. 

A downside protection strategy has been implemented in Ability Capital’s Turquoise Downside Protection Fund, which was recently awarded an “A” rating by research house van Eyk Research.