Avoiding shortfalls as one nears retirement. It’s the biggest pain point for most investors:
If the Financial Crisis of 2008 taught us anything, benchmarking to an index may not always be the best way to reach your retirement goals. Millions saw their nest eggs evaporate as even “stronger” investments that beat their benchmark indices suffered near catastrophic losses.
Living through the bear market convinced many that a better way to value the performance of an investment is by how it reaches desired outcomes, from pre-retiree to retirement.
Using a multi-manager approach to outcome-oriented investing may offer distinct advantages to investors as their outcomes evolve from wealth accumulation to drawdown needs in retirement.
Managing investment decisions for each life stage
As retirement investors transition through life, their desired outcomes shift along with the types of investments they need to achieve them.
Pre-retirees, for instance, need steady and consistent growth to build capital, but they also need to manage risk to avoid compromising their ability to reach desired outcomes. Those nearing retirement, on the other hand, are focused on preserving what they have, while closely managing downside risk to sustain returns in excess of inflation.
Defined Contribution plan based target date funds may help address these needs by managing asset class decisions over time to meet the outcome for each stage.1 As the fund nears its “target” date, managers shift allocation to lower volatility, income-producing investments to help ensure capital preservation as retirement nears and income generation in retirement to support drawdown needs. Multi-asset target date funds which employ multiple managers may give investors higher potential of reaching desired outcomes.
Tracking better risk control through diversification
In outcome investing, managing risk to dampen volatility and diversify sources of return is as equally important as generating income.
Employing a multi-manager approach allows for greater control of risk by:
- Systematically identifying and selecting managers with favorable risk/return profiles and stable and consistent investment processes, and including them as sub-advisers.
- Pairing industry leading managers with unique, yet complementary styles with low correlation, which can help more closely align risk/return profiles to outcomes including long-term growth, capital preservation, or income generation.
- Monitoring managers to ensure they perform as anticipated; if turnover, style drift, or process changes compromise their ability to deliver, managers can be replaced or allocations changed to increase the likelihood the fund will deliver on intended outcomes.
Getting more participants over the “finish line”
Judging by the dramatic losses experienced by many investors during the Financial Crisis, outcome investing with multi-manager funds may help investors avoid dreaded shortfalls as they approach retirement.
They offer access to industry leading managers and focus on better risk control through manager diversification, which may allow managers to more closely align risk/return profiles to desired outcomes for every life stage transition.
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