Grindrod Asset Management Scenario Simulation Tool


Imagine a 30-year retirement  plan based on projected market  returns that assume the portfolio will deliver inflation plus 5% returns consistently, every year, for 30 years. Imagine a long-term retirement plan assumes that annuity rates will be the same in 30 years’ time as they are today.

Imagine a plan that completely ignores volatility and the sequence in which market returns will be delivered to the investor – a plan that ignores bull markets, bear markets, crashes and booms. These plans are doomed from the outset as they take no account of the practical and mathematical truisms of real life. Most retirement plans are however based on these outdated linear models and are not much more than wishful thinking.

To illustrate the point about average returns, imagine encountering a sign on the river’s edge stating, “Average Depth 3 Feet”. Thinking it safe to wade across a three-foot deep river, one proceeds, falling into an eight-foot deep hole and drowning (reference Sam Savage: The Flaw of Averages). Even though the sign accurately stated that the average depth was 3 feet deep, the average was an inadequate proxy for the real life risk of crossing the river. Linear modelling in retirement planning is no different.

At Grindrod Asset  Management (GrAM) we strongly believe that a large disconnect exists between investment intermediaries (asset consultants, financial planners) and asset managers. This is a strange observation, given that one would expect these two industries to operate more or less hand-in-hand.

We evidence this disconnect by the fact that almost the entire financial planning industry is premised upon retirement models that assume average annual returns and ignore volatility and will therefore produce results that are random outcomes, not fair representations of reality.

Asset managers globally have done very little to bridge the gap as the asset management industry generally thinks about  portfolio returns in terms of the capital (price) gains made as the principle component of their total return, combined with some measure of short-term risk. Few asset managers pay attention to the role that regular income can play in the total return calculation. This is indeed puzzling, given that over the long term, income paid by equity, bond and real estate securities contributes a significant percentage of the total return generated.

Both pre- and post-retirement savers should essentially be income-seeking investors. Their long-term liability is a sustainable income stream to fund their living costs long after they stop working. Their retirement assets should therefore be invested in assets that accumulate income and ideally grow that income at a rate near inflation in the long term. By matching the retiree’s assets and liabilities in this way, inflation risk and longevity risk, the two most pronounced retirement risks can be hedged to a greater or lesser extent.

Many asset managers, if asked what their portfolio currently yields (how much income is produced as a percentage of the portfolio), would be unable to answer the question accurately. They pay less attention to the income component because the industry is capital-return driven. Asset managers tend to obsess about relative peer group returns, about their 12 to 18 month forecasts of what markets are likely to do deliver and about managing short-term volatility risk.

None of these short-term goals address the very specific risks of inflation and longevity present in a retirement plan. As a result, asset managers are often structurally and materially disconnected from the investors who invest in their products.
Asset managers are not the only contributors to this disconnect. Product houses selling retirement products, and the financial planning software used across the industry to construct retirement plans, are also contributing to the gap. This raises the critical question: “How do we bridge the gap?”

The industry needs to move away from using linear retirement models to calculate retirement outcomes. They need to develop and embrace more complex multivariate models that incorporate variability of returns with changing yields and risk. We need to demonstrate to investors that there is not one single path to an uncertain future, but a multitude of different roads leading there. We need to better demonstrate the impact of volatility on these outcomes. We need to understand and communicate the role of strategic asset allocation in driving long-term outcomes. We need to acknowledge that it is acceptable and indeed necessary, for a portfolio to demonstrate short-term capital fluctuation in exchange for delivering the long-term goal of inflation-beating returns.

Most importantly, we need to understand that retirement planning is a complex field with a multitude of competing forces, and develop tools that reconnect the retirement plan to the asset manager managing the portfolio. If these two activities are better aligned, we will have a much higher success rate of getting our retirees to sustainable retirements that can support higher drawdown rates for longer periods of retirement.

The GrAM Scenario Simulation Tool has been developed for asset consultants and financial advisors to construct retirement  plans that are more sustainable, using the Income Coverage Ratio™ that takes yields, volatility, sequence of return risk, asset allocation and fees into account.

Please click here to register and use the Scenario Simulation Tool. Please use the FSP number 55555 in order to complete the registration process.

Issued by Paul Stewart, Executive Director of Grindrod Asset Management (Pty) Limited

For interviews or additional information please contact:
Head: Fund Management
mobile: 082 332 7861
office: 021 492 0210 MARC THOMAS
Business Development Manager
mobile: 083 309 9106
office: 011 4591860