much on balancing the two . We need to take enough risk to generate the return that the client needs to meet their goals but not so much risk that we put those goals in danger . If my client needs 6 % per annum to achieve their goals , then I need to aim to deliver 6 % per annum with as much certainty and consistency as I can . There ’ s no point me aiming to generate 8 % if that introduces a real risk that I only generate 4 % and my client falls short of their goals .
A key focus in retirement will be on downside risk . This may be the risk of a fall in capital value reducing the sustainability of future income or , if using an income-oriented approach , the risk that income falls . Managing this risk within the client ’ s capacity for loss is essential and the FCA ’ s recent review of retirement income advice suggested more needs to be done here .
We can ’ t just think of downside risk in terms of its impact on the nominal level of income either . Inflation will reduce the purchasing power of a nominal income , and we need to consider how we mitigate this . We need to consider capacity for loss in terms of the client ’ s ability to withstand falls in their income in real terms .
These requirements to balance risk and return , limit downside risk and protect against inflation lead us to three investment ideas that are important for clients taking retirement income . We consider they are relevant whether advisers are building their own portfolios , selecting multi-asset funds our outsourcing to a third party .
First is the importance of active management . It ’ s true that when markets are rising strongly it can be difficult for active managers to outperform . However , good active managers can demonstrate that they can mitigate losses in falling markets . If our focus is on balancing risk and return and limiting downside risk , rather than maximising return , then active management of both asset allocation and stock selection can have a role to play .
Second is the benefit of equity income strategies . As well as generating income , which may be helpful for those using an incomeoriented approach , equity income has several characteristics that make it particularly interesting for retirement income investors .
It tended to have lower volatility and drawdown ( ie peak to trough loss ) than more growth-oriented equity approaches . This can help where income is being delivered by selling investments . Perhaps as important though is that there are indications that equity income , particularly strategies that are biased towards value and quality factors , recovers more quickly after a market fall than growth strategies . This is important because the quicker the recovery , the less time we are having to fund income by selling assets at depressed prices . On top of this , equity income should provide a hedge against inflation as it will often invest in mature companies that are able to pass on increases in their own costs so maintaining profit margins and generating dividends that keep up with underlying inflation .
Finally , fixed income is likely to be a significant component in most retirement income portfolios . With yields now looking more attractive than they have done in recent years , this asset class has much to offer . Fixed income can be used to generate income , drive growth , provide diversification and mitigate capital loss . Understanding what our clients need from their fixed income holdings will help us choose the best approach . Many “ low risk ” portfolios saw significant losses in 2022 because they were following fixed income strategies that were more positioned for growth . Of course , 2022 was hopefully a unique year , but it demonstrates the importance of picking the right fixed income tool for the job .
With the FCA review of retirement income advice challenging us to think differently about risk in retirement , many advisers will be looking at how they invest their clients ’ assets for retirement income . Starting with what makes retirement clients different in the first place will , we believe , quickly unlock how investment approaches need to adapt to recognise that .
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For Professional Clients only . Any views and opinions are those of the author , unless otherwise noted . This is not investment research or a research recommendation for regulatory purposes .
Doc ID : 2078850 . EXP : 4 April 2025
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