You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting with David Crosoer. He is chief investment officer at PPS Investments. David, appreciate the time.
A recent piece that you put out is fascinating reading. You describe yourself as a purist, and say that you’ve kind of really spent your career focusing on that concept that ‘inflation-beating returns’ means lots and lots of equities. The numbers stack up and it’s been largely the right space to be.
But you are conceding that post-retirement investing is perhaps forcing a rethink around that.
DAVID CROESER: Yes, exactly. I used the analogy of driving, where I grew up with station wagons and felt station wagons were the way to go, and we all just need to suck it up.
Obviously the car industry has had to evolve as people’s tastes have changed and they’ve realised that not everybody wants to sit in a station wagon and drive an SUV. Those solutions have obviously become more and more sophisticated and now an SUV drives almost just as well as a station wagon.
I think similarly with the industry we’ve kind of always felt you just need to take on this equity-market risk and suck it up. And if you don’t like the short-term volatility, well, it’s in your best long-term interest to hold equities. And if you miss the client, you just need to live with that – a bit like when my dad told me to have cold showers.
Read:
Getting the most out of your living annuity
The plight of so many entering retirement today financially unprepared
80% of retirement income success is decided in your first 10 years
And as the baby boomers have, I suppose, reached retirement, and as investors start to decumulate assets, that feels increasingly challenged – that the equity market, the volatility of equity markets, is quite challenging.
And even for investors in pre-retirement who find the equity volatility uncomfortable, the industry is increasingly trying to think of ways to not have to force people to go through that kind of short-term volatility with equity.
So I think this is a very live thing that the industry is trying to solve.
We probably haven’t gone as far as the car industry with getting an SUV that drives as well as the car. The car industry has been dealing with that for 20, 30 years.
But certainly increasingly we’re coming out with solutions that are trying to meet that requirement of still giving equity-based returns, or quite close to that – but not with the sort of short-term volatility you get from equity markets.
SIMON BROWN: I get your point. This is not to say equities do do the heavy lifting, and equities can work in retirement. We are not saying that something’s going to break the performance that we’ve seen from it. And the line that comes from it is how that return is experienced.
I remember the question I would be often asked back in the day when buying: How would you feel if it went down 40%? The honest answer is, I’m not sure, but at the time I’m probably going to dislike it intensely. It’s that relationship, the experiencing of the return, which really is what matters.
DAVID CROESER: Yes, particularly in, for example, post-retirement, where you’re drawing an income, it actually becomes a real binding constraint. We’ve always had an industry being able to say, ‘In pre-retirement, well, if it’s down 40%, you’re just buying it cheaper next month in your monthly contribution. So do you really need to worry that it’s down 40%?’
But in post-retirement it actually can be very significant if you are also trying to draw an income. I think the main point I’m trying to frame is we just need to think about the problem differently. So when I said for most of my career I’ve been a purist, I’ve really felt what the risk is of not holding enough equities, and really thought around solutions that need to do that.
But if you shift that to ‘the downside is really significant’, you start to think differently. What is the risk of falling 40%, or what is the risk of underperforming cash? And if you start to think like that from the first principles, you have a great ability to try to construct things that look different.
Read:
The art of asset allocation
Why top investment returns can still ruin your retirement
The retirement income mistake that looks fine on paper at first
Now, one of the big challenges we have is that our industry is very much framed in the equity is good for your kind of framing. I mean, most of our unit-trust categories are framed like that. And round the braai everyone looks at how their peers did, and how the equity market did.
The big challenge I think we have is trying to frame the problem differently. So if you’re trying not to have significant drawdowns and you’re trying not to underperform cash, then around the braai you shouldn’t be comparing your portfolio to one that is taking on a lot of equity market risk and could be performing really strongly.
The biggest challenge I think we probably have is that investors, all of us, want our cake and want to eat it, but we actually have to be quite explicit about what’s really important for us, and how we want to build portfolios that really deliver on what’s important.
So in a station wagon, what are you wanting, in an SUV what are you wanting? And then intentionally construct portfolios to deal with that rather than trying to do everything for everyone – which is just a recipe for disaster.
Read:
Investors pile into funds betting on elusive market volatility
Benchmarks demystified: From market indices to personal portfolio goals
SIMON BROWN: That’s a great point, because my next point was going to be exactly around that, which is it’s important to understand what we are buying, what we are getting, what we are trying to fulfil. These are the age-old questions.
But I suppose, to your point, go back to those first principles. Go back to those first simple questions and work it from there.
DAVID CROESER: Exactly. We as a multi-manager can also make this error. If we want to manage it to protect on the downside and to outperform cash in the market where SA equities have gone up 40% like last year, one shouldn’t necessarily be too critical that they might have underperformed a peer group that was willing to take on the risk of a drawdown but performed quite strongly.
Similarly, if we are not that worried about the short-term volatility and want to participate on the upside from equities, we could be critical of a manager that hasn’t taken on enough risk.
But we need to be quite explicit about what we’re looking for from the manager or the portfolio, and then basically back the portfolio to deliver that.
Read:
Doing nothing is a decision – and it’s costing investors
Cash is king, until it isn’t: Why old financial adages need context
I think that’s a very useful evolution of where we go as an industry. And the more we figure out how to solve for post-retirement, and the more we are explicit about what we’re trying to achieve with our clients.
Cofi [Conduct of Financial Institutions Bill] is also helping us get there as an industry where the regulator is asking us to be very explicit around the target market and what we’re building for the client and how these are meeting clients’ needs.
So I think we’re in an exciting place, both from where a lot of the assets in the industry are going towards post-retirement, as well as where the regulation is going – as well as the kind of technology or ways we can think about the market that can help us solve.
Read:
What are you really paying for? The hidden costs behind financial advice
Beyond products: New legislation puts focus back on clients, not just their money
SIMON BROWN: I take your point absolutely. It’s evolving. But at this point, perhaps it’s a faster evolve than we typically see.
We’ll leave it there. David Crosoer, chief investment officer, PPS Investments, appreciate the time.
#station #wagons #SUVs #Retirement #portfolios #era