Partner Insight: Annabel Tonry, executive director at J.P. Morgan Asset Management (JPMAM), explains why, in a challenging return environment, investing across multiple asset classes and deploying active management can help improve members' retirement outcomes
First, schemes should encourage their members to save more. We believe the best approach to encouraging saving is to have a robust, well-designed default fund that allows members to focus on their savings levels rather than worrying about how to invest their assets. We know that sharp declines in the size of savings pots can cause members to reduce savings rates - or stop saving altogether. Steadier, more consistent returns are therefore vital in encouraging members to stay the course.
Second, focus on diversification. Diversified growth funds (DGFs) are one approach DC schemes have used to help diversify their default funds cost-effectively. Now we are also starting to see DC schemes incorporate strategies into their default funds that traditionally have been used by defined benefit (DB) schemes, to help mitigate downside risk without compromising returns. These include multi-asset credit strategies, which can offer access to high conviction ideas across the credit spectrum.
Third, employ active management. Skilled professional investors can generate alpha through adept security selection and/or active asset allocation — opportunistically shifting exposures across sectors, asset classes and regions as attractive opportunities present themselves. In an environment where returns are likely to remain low, the additional alpha that you get from an actively managed strategy can make a meaningful difference, especially when compounded over the lifetime of a defined contribution (DC) saver.
Even a small amount of additional alpha via active asset allocation decisions or security selection each year - 50 basis points, for example - can make a huge difference to somebody when they retire and that sum has been compounded over 30 or 40-plus years.
Click here to learn about why DC schemes should take a flexible approach in a low-return environment.
