top of page
  • JASON TEH, Chief Investment Officer

Be careful how you invest in equities during the ‘retirement risk zone’

As a Sydney-based fund manager I always look forward to presenting on adviser roadshows.

Last week’s tour in Victoria was no exception, with a range of financial adviser briefings in Geelong and Ballarat – accompanied by Copia Distribution Manager Mani Papakonstantinos.

Vertium Chief Investment Officer Jason Teh presents to financial advisers on his recent Victorian road trip.

I’m always interested in the informal conversations – whether it’s about ASIC obligations, building referrals, platform considerations – because it gives me greater awareness of the everyday challenges confronted by advice practices.

When the conversation turns to retiree clients, what continually strikes me is the dichotomy in how advisers deal with the Australian equities question.

Why this matters is shown in the chart below. In the years just before and after retirement is a period known as the retirement risk zone. It’s a decade when the nest egg of your client, or a typical investor is at its highest level.

I’m a believer that financial advice offers its greatest value during the years in this retirement risk zone.

If you think about the life journey of the general investor, there is no other time in their lives when their financial wellbeing is at risk to a sudden decline in value of their nest egg – simply because it’s at its peak balance. This is known as sequencing risk. A 5% decline in equity markets during this zone is not uncommon, and it can have a huge impact and shave years off a retirement portfolio, simply due to bad timing.

Put it this way, it’s worse having a bad performing year when you have more money, than when you have less.

To me, retirement risk zone demonstrates why portfolio strategy for retirees is more about protecting capital as much as possible (and that still means investing in equities), and less about shooting the lights out with total return performance.

How do you get your equities?

There seems to be three broad camps when it comes equity investing for retiree clients:

  • Direct equities

  • Accumulation strategies

  • Equity income

Direct equities

The first is the easiest to explain: direct holding means an investor holds shares in their own name, most likely via a broker or even a Separately Managed Account.

Accumulation strategies (active or index funds)

The accumulation strategy describes traditional Australian equity approaches designed for pre-retirees that seek to maximise total return and capital growth. In pursuit of wealth, accumulation investors are generally happy to accept a reasonable level of risk volatility in their capital, because they have time to recover and wages can help top up any shortfall.

Interestingly, some advisers I speak to blend those same accumulation strategies with cash for their retiree clients – using cash a lever to dial down risk. This is often described as a ‘bucket approach’ and while it’s easy to understand some logic behind the strategy, it may not be an optimal strategy for the average retiree for two reasons:

⦁ With interest rates at 1% the cash component will deliver an extremely low yield, and depending on the allocation, it puts the portfolio under yield stress and may simply force the retiree to draw down faster on other assets that have potentially higher yield – such as equities.

⦁ The equities bucket, even with a strong performing accumulation equity fund – is still highly volatile. And it may not provide adequate refuge from sequencing risk if a retiree suffers a drawdown or decline when it hurts most – the retirement risk zone years when their super balance is highest. This could be a recipe for disaster if markets have a sharp correction of a 10% magnitude or beyond.

Equity Income

Equity income funds are designed to provide a lower level of risk than accumulation strategies and provide a higher amount of their return as dividend income. Generally, you would expect an equity income to have lower capital volatility than an accumulation fund, and higher income at the same time.

The trade-off is that equity income funds tend to have lower long-term capital growth potential – but then again, that’s not the primary purpose of investing in equity income for retirees.

The reason equity income should be considered as part of a retiree portfolio solution is its lower risk profile. If the amount of capital loss during a sharemarket decline is minimised, the nest egg last may simply last longer, all other things equal.

It’s actually a simple equation to work out and the chart below is an easy way for retirees to interpret. It shows why an accumulation strategy with higher risk may reduce the lifespan of a retirement portfolio, while a lower risk equity approach can extend a portfolio by many years.

In the chart is it assumed both portfolios start at age 65 with $614,000, with an assumed 10% per annum return on shares over the long term, cash return of 1.5%, annual living costs of $43,255 (based on ASFA comfortable retirement), and CPI of 2%. To build in a margin of safety during the retirement risk zone we also assume equity markets suffer a 20% decline in year one of retirement.

GREY LINE: A common strategy called the bucket approach (grey line) blends 50% cash and 50% equities accumulation strategy with a risk sensitivity that equates to the share market (Beta of 1).

The bucket approach only lasts 17 years, to age 82.

GOLD LINE: An alternative approach is to invest in an equity income fund with half the risk or share market sensitivity (Beta of 0.5)

The lower risk portfolio lasts 35 years before the retirement balance is exhausted at age 100.

In this example, switching to a low-risk equity strategy may double the theoretical lifespan of a retirement income portfolio.

Vertium Equity Income Fund

Our research indicates the Vertium Equity Income Fund has the lowest level of equity market sensitivity (Beta) compared to other equity income funds in the Australian market, when assessed from its inception in April 2017. Lower beta means lower volatility of returns and hence less chance of negative surprises. The chart below compares the results.

Vertium seeks to deliver a low-risk experience for equity income investors by its focus on low portfolio risk first, stock selection, and deployment of cash as a key risk management tool. A low Beta is not specifically targeted, but proof of the process.

Speak to Copia today (Vertium’s distribution partner) to discuss how Vertium may lower your market risk exposure and potentially expand the life of a retirement portfolio.


Standard deviation is based on the variability of monthly net returns.

Past performance is not a reliable indicator of future performance. This document is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific reader. As such, before acting on any information contained in this document, readers should consider whether the investment is suitable for their needs. This may involve seeking advice from a qualified financial adviser.

Copia Investment Partners Ltd (AFSL 229316, ABN 22 092 872 056) (Copia) is the issuer of Vertium Equity Income Fund. To invest, contact Copia on 1800 442 129 or email or visit A copy of the Product Disclosure Statement (PDS) may be obtained by either contacting Copia or from the website. Investors should consider the PDS in deciding whether to acquire or continue to hold the product. Any opinions or recommendations contained in this document are subject to change without notice and Copia is under no obligation to update or keep any information in this document current.


bottom of page