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Super presentation notes - W hat is the research question...

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What is the research question? Main results and assumptions used Summary to contribution to academic literature. What is new about the findings, relevance of the contributions. And why does this issue matter? Problems Asset allocation is different at the same target date for different fund managers Can lead to complacency and if retirement horizon changes, then asset allocation may not be suitable. One size fits all for a typical fund participant and does not allow flexibility. “Russell research shows a huge segment of SMSFs do not want to retire at 65, so working to a definite date is not appropriate for everyone. Some people want to build retirement assets to a specific date, but other want more cradle-to-grave products.” Fund does not take into considering equity market conditions. So tactical asset allocation is not possible. Many layers of fees-underlying fund and the lifecycle fund provider Only based on age Often too conservative Only considers this fund as sole investment so if you have other investments, then it could throw you off whack in terms of total portfolio allocation. The biggest problem, however, is the simplistic ‘set and forget’ approach of most lifecycle funds which make allocation switches based solely on age, according to Drew. His work with QUT researcher, Anup Basu, found the account balance upon which the risk is taken (that is, ‘fund size effect’), is far more significant than age. Their research has shown dynamic lifecycle switching strategies incorporating both account balance and age exhibit “superior performance to current investment practices”. Drew and Basu believe lifecycle strategies need to concentrate on several factors: the real objectives of the investor, asset allocation, dynamic switching strategies, a whole-of-life approach and optionality (which uses derivatives to mitigate the shocks members face over their lifetime). The importance of funds designed to provide appropriate asset allocations for investors both up to and right through retirement is highlighted by research undertaken by Russell. It shows that of every dollar drawn down in retirement, 60 cents comes from investment return earned during the decumulation phase.
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Benefits: Regular changes to the fund’s asset allocation as investors age which is not static and which reflects how you are travelling through life The simplicity of the lifecycle fund approach as they do not require constant input or change. Pros and cons of lifecycle funds Positives • Automatic changes to asset allocation • Regular rebalancing of the portfolio • Incorporate best thinking about portfolio construction • Low-cost-cheaper than most managed funds but often most expensive than ETFs Negatives • One size fits all • Limited range of funds included • Difficulty coordinating with other investments • Can be high-cost-with layer of fees.
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