Canadians approaching retirement today require new solutions, according to Mackenzie Investment's head of fixed income
During the heydays of baby boomers, the retirement investing playbook used to be fairly straightforward: as you go from a professional work life to a retired life, your portfolio should shift from carrying equity-like risk to become more bond yield-oriented. But these days, it’s not that simple.
“Through the ‘90s and the 2000s, yields were in the mid- to high-single digits, and could even reach double digits — so far ahead of inflation that some felt comfortable not holding any equities when they retire,” said Steve Locke, senior vice president and head of the Fixed Income Team at Mackenzie Investments. “But that’s really changed.”
Today, many Gen Xers approaching retirement are seeing their professional income changing or being reduced. Over the past 10 years, they’ve seen very low levels of bond yields, particularly for the more defensive government bonds and the highest-quality corporates. And as Locke noted, they’re likely to see those low levels for the next 10 years as well.
“The decision to dial down risk, at that point, is very confusing, because they think ‘I can’t do that,’” he said. “But in fact, they’re only looking at part of the answer.”
With that limited perspective, today’s retirement investors may be prone to making critical mistakes. One is assuming that they need to move into equities because bond yields are too low. Instead of thinking about their portfolios as two separate pieces, Locke believes that investors should consider it as a whole, which would allow them to balance it better and not take on as much equity exposure.
“Should the equity markets fall and make them feel very nervous, they might decide to cash out and move to something less risky,” he said. “They’re locking themselves into a much lower standard of living from their retirement portfolio over time.”
Another possible error would be to sidestep low bond yields by buying GIC or savings products instead of bonds. When investors turn in that direction, Locke said, their portfolio ends up creating less wealth and total return over time, as it takes away the volatility mitigation that’s provided by bonds’ negative correlation with equities.
“In the low-yield environment, investors buying GICs may think ‘that’s the best I can do because I don’t want bond-market volatility,’ when in fact they actually should want that volatility to keep their total portfolio risk low,” he said.
With those problems in mind, investors must be willing to consider different fixed-income solutions. On Mackenzie Investments’ shelf, Locke said there are non-traditional strategies, core strategies, and unconstrained strategies that may have more global mandates; those products, he said, can be used by do-it-yourself investors who can conduct the proper due diligence and research as they build their portfolios.
“The way that we’ve built our fixed-income products and the way that we offer them to investors and advisors considers the risk-adjusted return and the appropriateness in a portfolio,” he said.
Some investors not comfortable with a DIY approach may prefer a packaged solution that meets their retirement needs. For such cases, Locke said, Mackenzie has an income-based balanced fund lineup. The Mackenzie Income Fund, whose equity allocation goes no higher than 40% in dividend-oriented equities, has a core-plus style balanced portfolio for more defensive-minded investors. Those who are more aggressive, on the other hand, can opt for the Mackenzie Global Strategic Income Fund, which packages domestic and global dividend-oriented equity portfolios with core-plus, unconstrained fixed-income mandates.
“These have been exceptional performers over time, and on a risk-adjusted sense as well,” Locke said. “So I think they give the investor looking for more of a full-package, income-oriented solution something to use and in building their portfolio. As a core of their portfolio, I think these products make a lot of sense.”
