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Retirement income needs ‘building block’ approach

Promoted by  Equity income, real income and fixed income - these are the three must-have asset class building blocks for a sustainable retirement income in a low interest rate world, according to Legg Mason.

That was the message received by 140 attendees at the global fund manager's Retirement Income Symposium in Melbourne on June 18 (Sydney will host on September 16).

Each building block has a specific role to play: equity income can provide rapid income growth, real assets offer inflation protection, while fixed income delivers a low-volatility income balance.

A better blend

It may seem like an obvious solution, but the thought of combining the three building blocks of equity, real and fixed income for a blended retirement solution has eluded the Australian investment industry for a long time – until Legg Mason launched its Multi Asset Retirement Income Trust in April 2014. 

Legg Mason is the 2015 Fund Manager of the Year (Lonsec/Money Management) and has been an industry pioneer in developing retirement solutions that includes equity income, real income and now multi asset income.

The Trust is possibly the first of its kind in Australia and pleasingly has returned 18% after fees for the year to 31 May 2015. With a fee (ICR) of 0.8%, it’s 10 basis points less expensive than a passive diversified fund, for a $30,000 minimum investment.1

Legg Mason believes the Trust may tick many retiree boxes: innovative fund design, strong performance, low fee and a growing income target. Added to that, the Legg Mason Multi Asset Retirement Income Trust itself was a finalist ‘Investment Product of the Year’ at the 2015 Rainmaker MAX Awards.

Advisers can choose the Trust ‘off-the-shelf’ which invests in an equal blend of equity income, real income and fixed income, or build their own solution on top of the blend, as each block is also available separately.

The Trust aims to provide a total return of CPI plus 4% annually, and grow the income stream in line with CPI.

For more information on the Legg Mason Multi Asset Retirement Income Trust, click here

Sydney Symposium: register now

Legg Mason is holding its Sydney Retirement Income Symposium at the Sofitel on 16 September 2015. The half day event will provide an overview of how asset classes can deliver retirement income solutions, and will also include external guest speakers. CPD points will be awarded. To register your interest in attending please contact [email protected].


Building blocks of retirement income


1: Fixed Income: Low capital volatility

This includes defined income products such as term deposits and annuities. This group has been considered the safe house for retirement income particularly since the GFC. Capital may be protected (subject to the issuer not defaulting) and the income may be defined for a term, but not beyond that term. This is where the risk lies.

In this category are also bond funds which tend to offer greater potential return and liquidity, although some variability in income and capital are the main trade-offs. The Legg Mason Western Asset Australian Bond Trust is highly diversified across a range of debt issuers, which provides low default risk across the portfolio.

If a retiree invests in a term deposit in the belief a bank is sound, why not invest in the higher-yielding bonds of that same bank held in a professionally-managed bond fund?

2: Real Assets: Inflation protection

Real assets can act as the 'inflation protection' bucket of the retiree portfolio.

Martin Currie Australia define real assets based on what's included in their Real Income Strategy: listed property securities, infrastructure and utility sectors. This combination has been successful in delivering a 12-month return of 26% for the Legg Mason Martin Currie Real Income Fund (after fees).

For advisers, the benefits of real assets in client portfolios is that they can provide natural inflation protection, so income is expected to go up, not down. Companies like Transurban fit into this category and they have contracts in place to increase tollway pricing each year - this offers tremendous value if you are on the shareholder side. The future performance of real assets is closely linked to Australia’s population growth. 

3: Equity Income: Income Growth

Equity income funds rely on the dividends of ASX-listed companies to generate income that can grow perhaps faster than any other domestic asset class. The key message for advisers to communicate to clients is that the volatility of dividends is not the same as shareprice volatility, which is why equity income funds are more suited to retirees. For the five years to May 2015, dividend volatility has been 3.4%, far lower than shareprice volatility of 9.7%.

Some equity income funds offer protection strategies, often through options. The Legg Mason Martin Currie Equity Income Trust does not invest in derivatives or provide a protection overlay, based on the philosophy that if equity income is blended with other low risk assets like fixed income, that provides natural protection without additional costs that may ultimately diminish investor returns.


Sources: 1 www.vanguard.com.au.

Any reference to “Legg Mason Australia” or “Martin Currie Australia” is a reference to Legg Mason Asset Management Australia Limited ABN 76 004 835 849 AFSL 240827. Martin Currie Australia is a division of Legg Mason Asset Management Australian Limited. Any reference to “Western” is a reference to Western Asset Management Company. Neither Legg Mason Australia, nor any of its related parties, guarantee the repayment of capital or performance of any of the trusts referred to in this document. Past performance is no guarantee of future performance. Applications to invest in a Legg Mason Trust can be made using an application form comprising part of the current Product Disclosure Statement, which is available from our offices or on our website at www.leggmason.com.au. Certain eligibility criteria applies. Legg Mason Australia does not guarantee the accuracy or completeness of this document. To the extent permissible by law, Legg Mason Australia accepts no liability in contract, tort (including negligence) or otherwise for any loss or damage suffered as a result of reliance on this document. This document does not constitute investment advice, and has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should read the Product Disclosure Statement carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances.