Colonial First State Global Asset Management (CFSGAM) has seeded a fund that it hopes will help Australian investors manage post-retirement issues with minimal risk.
The problems currently faced by investors in the post-retirement phase are too complex to be solved by any one asset class or team, making a multi-asset solution necessary, according to Epco van der Lende, head of multi-asset solutions at First State Investments.
Through the bank's recently-developed CPI-plus fund, the team aims to match Australian CPI plus 4.5 per cent.
van der Lende said 4.5 per cent was around the point that was achievable, while still being meaningful for investors and without overtly exposing them to risk.
"If you could achieve that you could spend 4.5 per cent of capital with constant in-perpetuity funds. That's relevant for foundations and retirees," he said.
van der Lende described the fund as an "objective-based solution for a spending problem", through which the overall design taps into advisory capabilities. "It's key to use a dynamic asset allocation process in day to day workings," he added.
The team has almost total discretion in creating the exposures from those classes it deems fit, he said. "We could tailor it to any target given different risks but this should be relevant to people and institutions," he explained.
Petr Kocourek, senior portfolio manager at First State Investments, said the aims of the group's CPI-plus investing initiative include certain constraints but it also allows access to longer themes.
The biggest allocation in the fund since it was seeded two months ago has been to Australian equities at around one third of funds under management (FUM), but it's an asset class that doesn't hedge inflation well. This has led to a specific style of exposure - for example, with no financials in the Australian equities component - Mr Kocourek said.
Global equities make up close to a quarter of FUM through a mix of emerging and developed markets. "Given the long-term aims, we won't have significantly more than the 55 per cent equities allocation that's in there currently," Mr Kocourek said.
He also noted a small (5.5 per cent) allocation to precious metals which Mr Kocourek described as a partial hedge, including gold, which is a partial tail hedge.
"We're not trying to get the best return, we're not trying to shoot out the lights," he said. "We want to deliver CPI plus 4.5 per cent. You can start building insurance over time against times that aren't as favourable."
Mr Kocourek also outlined a component of volatility exposure as a form of insurance, hedging against times when the markets go down.
"You want the portfolio to mimic inflation but want the plus return," he said. "We're taking on some equity and commodity risk. The risk/return trade-off has to be favourable for those allocations."
Mr Kocourek said while the team uses quantitative analysis, it applies a "common sense filter" to its investments - for example, using experience to gauge when inflation might increase and then adjusting investments accordingly.
