The steep market downturn in the wake of the coronavirus pandemic left many lasting lessons about the nature of risk and return. It also presented the ultimate test for fund managers–and not all passed.
"One of our fund managers had been saying that they're waiting for the market downturn to happen for years – and then it did happen," says Connect Financial Advice Planner Amy Hoskins.
"All of a sudden they had all the excuses in the world: 'It was a health-related downturn; we weren't ready.' Whereas with Milliman's SmartShield, they proved it worked."
It shows the difference between traditional risk management strategies such as diversification and a value approach, which have been curtailed as interest rates hit new lows, and a direct risk management strategy.
It has also been a crucial real-world demonstration for many of Hoskin’s clients, who are pre-retirees and retirees that have built substantial superannuation savings.
"At that stage in life, their two biggest concerns are what happens if it goes backwards, or what happens if it doesn't last? They need the returns, but managing the emotional side of it is just as important as the numbers side of it," says Hoskins.
Hoskins uses SmartShield Managed Risk High Growth to manage risk for her pre-retiree and retired clients, who are particularly at risk of a market downturn. Sequencing risk can decimate a lifetime of savings given they no longer have the same time to recover from a market downturn as younger investors.
"We diversify against asset classes, managers and manager styles and I believe SmartShield fits in perfectly with mitigating sequencing risk on funds with drawdown requirements. Clients also need to be reminded that we're living longer, so the fact SmartShield High Growth has 90% exposure to growth assets can improve long retirement outcomes," says Hoskins.
The COVID-19 downturn caused one of the fastest equity market falls in history. It was fortunately followed by one of the fastest recoveries and markets have since reached new record highs.
However, Hoskins says clients need to consider the impact a potentially longer recovery would have on their goals.
"There's been a number of market hiccups in recent years, but the recoveries have been quite quick compared to the global financial crisis (GFC) which took 18 months or more. What happens if it is a longer recovery?" says Hoskins.
Significant monetary and fiscal stimulus prop up the Australian economy to counter lengthy coronavirus lockdowns that are likely to push GDP growth into the red by about 3% in the September quarter–the second biggest contraction in history1.
Hoskins says taking her clients through different scenarios, including the potential impact of an extended downturn, using Milliman's SmartShield digital portfolio simulator helps them to understand why risk management is important.
Hoskins, who is based in Adelaide, began her career just as the GFC was reshaping the world.
The simulator allows advisers to show the impact of an extended GFC-style downturn on a client's sustainable income across all four of Milliman's SmartShield managed accounts (moderate, balanced, growth and high growth) versus traditional portfolios without downside protection.
"It eases my clients' concerns in those periods where we don’t know how long markets will take to recover. Clients are scared and it helps to stop them making poor choices to exit the market because the fall hasn’t been as drastic for them,” says Hoskins.
"While we use SmartShield as part of a core-satellite strategy, there are a few clients we have put in there completely as a whole of account solution, because they don't have a lot of funds under management," says Hoskins.
The risk management strategy embedded within the Milliman SmartShield portfolios is designed to smooth market volatility and dampen sustained market drawdowns. It is implemented using future contracts on major market indices.
"The proof is in the pudding with SmartShield because you can actually see it."
You can check the potential benefits of downside protection on your own client portfolios by using Milliman's SmartShield digital portfolio simulator at: https://advice.milliman.com/en/insight/The-SmartShield-digital-portfolio-simulator.
For more information about Milliman’s SmartShield Managed Accounts, please email [email protected].
1 Opening statement to the Economics Legislation Committee | Treasury.gov.au. (2021, November 09). Retrieved from https://treasury.gov.au/speech/opening-statement-economics-legislation-committee-1.