The Experts

Anthony Golowenko
+ About Anthony Golowenko

Head of Investments, Clime Asset Management

Anthony has 20 years investment experience and is passionate about developing innovative solutions aligned with investor objectives, particularly those in or approaching retirement.

Anthony joins Clime from State Street Global Advisors where his most recent roles included Senior Portfolio Strategist – Asia Pacific, Head of Active Australian Equities and Senior Portfolio Manager. He has significant experience in domestic and international equities, return enhancing and risk reducing overlays and objective based strategy development.

Anthony holds a Bachelor of Mathematics and Finance degree with First Class Honours from the University of Technology, Sydney, and is a CFA charterholder. He is involved in the community supporting Sylvanvale Disability Services and Tour de Cure.

Don’t accept average returns

Thursday, July 14, 2016

By Anthony Golowenko

If someone asked ‘How are you?’ and you responded with ‘I’m feeling average’, the connotation is that you’re not feeling well.

When it comes to investing for your retirement security, the concept of average is commonly employed, but is that good enough? Individual investors rely on achieving long-term, average returns under the ‘traditional balanced approach’ used by many superannuation funds.

The truth is that as an individual either approaching or in retirement, you are unlikely to achieve a smooth return path of the assumed, long-term average return.

Five years prior, and five to ten years post your retirement from the workforce are referred to as ‘The Retirement Risk Zone’. During this time, individuals have a super balance as large as it’s ever going to be and face considerable risk to their retirement security from a sharp market downdraft.

The traditional balanced approach offers very little in the way of downside protection and very little in the way of differentiation between accumulation phase and retirement phase investment. It also has an overdependence on diversification benefits, and as previously mentioned, an implicit reliance on achieving long-term average returns. We don’t think this traditional balanced approach is good enough for everyday investors seeking to achieve security in their retirement.

The retirement risk zone

The reason why the five years prior and five to ten years after retirement pose the greatest risk to retirement security is relatively straightforward. You are accumulating what will likely be the most savings you will ever have in your life to sustain retirement, and at the same time, your window for making regular contributions is growing shorter.

The risk posed to your retirement security from a major market drawdown during these periods is significant and needs to be managed. The following outlines what we view as limitations of the traditional balanced approach employed by the majority of superannuation funds, along with potential solutions we are either implementing now, or in the process of developing.

Limited downside protection

Relatively narrow asset class ranges and incremental asset allocation ‘tactical changes’ means a traditional balanced approach offers limited downside protection to investors.

Capital preservation is one of the foundations of long-term value investing. During times of increased uncertainty, there is a corresponding increase in the likelihood of capital loss from growth assets such as equities. We believe in a wider asset class range and undertake meaningful tactical changes in asset allocation. Equity risk can be more effectively managed to deliver a smoother return profile to investors.

Accumulation and retirement phase investors

While the mirroring of accumulation and retirement phase strategies is starting to change, traditional balanced approaches still offer little differentiation between the two. What this effectively says is a 25-year old accumulation phase investor has the investment needs and objectives equivalent to a 45-year old accumulation phase investor, and again to a 65-year old, or potentially even an 85-year old retirement phase investor. There is a considerable difference.

We employ an objective-based approach focusing on;

  • Growing retirement savings,
  • Guarding retirement savings along the way, and;
  • Generating meaningful retirement income

In the investor phases above, there’s a clear difference in the likely weightings assigned to these three primary investment objectives.

Overdependence on diversification benefits

A traditional approach relies upon the long-term diversification attributes typically seen in a normal market environment[1]. In more volatile market conditions, these long-term attributes offer far less in the way of diversification benefits. Correlations in highly uncertain market environments will tend to move towards +/-1. We have observed market participants becoming more short-term focused and in a risk on/risk off investing mindset. While holding in calmer market environments, long-term diversification attributes are far less dependable in times of elevated market volatility.

We are developing a framework of purposeful mandate design. Within this framework, each sub-portfolio has a specific role to play in achieving the investment objectives of the broader portfolio. Cash is maintained to preserve capital and as ‘dry powder’ to pursue selective opportunities across the portfolio.

Overreliance on achieving long-term average returns

Your retirement journey is very likely to be anything but average. Long-term results over twenty or even thirty years are insightful, however also contain an inherent sequencing risk[2]. A series of strong negative returns achieved early in your accumulation phase saving cycle is far less detrimental to your retirement security than if equivalent strong negative returns were to occur within your ‘Retirement Risk Zone’. When it comes to your retirement journey, you only really get one chance to get it right. For those investors either approaching, or in retirement, we believe that the traditional balanced approach is not good enough for everyday investors seeking to achieve security in retirement.

[1] Normal market environment in this case refers to generally stable market conditions where volatility, and investor risk aversion are not elevated.
[2] Sequencing risk refers to the order in which returns are achieved.


Finding returns with objective based investing

Thursday, June 30, 2016

By Anthony Golowenko

Objective based investing is relevant to everyday Australians seeking to achieve security in their retirement. But what is objective based investing, and how does it differ from a traditional approach?

Objective Based Investing

This concept has been around for hundreds, arguably thousands, of years. Simply put, the term ‘objective based’ refers to investing with a specific absolute return, risk and/or income target. Some examples include:

  • I want my investments to achieve an annual return of inflation at +3%;
  • I want my equity investment to have a total risk [1] no greater than 12% p.a.;
  • My income portfolio objective is to achieve a gross yield of 5% p.a.

How this is different from a traditional approach?

Objective based investing does not explicitly refer to benchmarks; established market indexes are typically weighted by size (and determined by price). Figure 1 provides a high-level comparison of objective based and traditional approaches.


Source: Clime Group

The diagram above highlights the important differences between the two approaches. In this case, we’ll use an equity investment to illustrate. Starting with the right hand side of the diagram, this shows the primary objectives under a traditional approach.

Traditionally, the return, risk and efficiency are measured relative to a market index. This equity approach seeks to outperform the market index by 2-4% p.a., while assuming relative risk of no more than 5%.

A traditional approach

A successful manager will outperform the market index, without being too different. The left hand side shows the same key objectives under an objective based approach. Return, risk and efficiency are all measured on an absolute basis. This objective based equity approach seeks to deliver a total return of 8% p.a. while assuming total risk of no more than 12% p.a.

An objective based approach

A successful manager will deliver strong risk-adjusted total returns.

Why does this matter to everyday Australians?

An objective based approach allows a manager’s investment objectives to be directly aligned with investor’s objectives. For the vast majority of everyday Australians, their primary investment objective is to achieve security in their retirement.

A traditional approach does not directly align the manager’s and investor’s objectives. At best, there is only a loose association between manager and investor objectives, which is highly dependent on the sequence market index returns are achieved in.

There are two key reasons for this;

  1. The market index is not the market; and
  2. Building portfolios based on the market index is nonsensical;

Reason one: The market index is not the market

For a variety of reasons, and driven by a number of powerful forces, over the past quarter of a century investors seem to have forgotten that widely accepted indices are no more than a barometer of the broader market. Considering Australian equities, the widely accepted market indices are dominated by just a handful of companies [2].

When it comes to Australian equities, I believe there is more to life than the major banks, BHP and Telstra! Yet it is these handful of stocks that typically dominate Australian equity portfolios. There are a whole range of investment opportunities out there, so why not go and grab them? The good news is, by adopting an objective based approach, you can.

Reason two: Building nonsensical portfolios based on the market index

Under a traditional approach, investing differently to these index weights is viewed as risky. The largest ten stocks in the S&P/ASX 200 Index account for almost half of the total index’s weight. The big four banks represent more than 25% [3]. To me it does not make sense that diversifying away from the significant concentration risk contained in the established Australian equity market index is risky!

An objective based approach applied to Australian equities focusses on the most favourable investment opportunities, forgets traditional indexes, and manages total risk. To me, this makes a whole lot more sense.

In summary, objective based investing refers to an approach focussed on absolute return, risk and/or income targets. This investment approach directly aligns manager and investor objectives and is well suited to helping everyday Australian achieve security in their retirement.

[1] In this context total risk is refers to the variability of total returns on an annualised basis.
[2] Index weighting is effectively determined by company size. The largest companies have the highest weight and vice versa.
[3] Source: S&P/ASX 200 Index weights as at 17 June 2016

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