Transcription

• Speaker #0

  This podcast is only for the attention of professional investors in the financial industry. Outer Blue by Amundi. Welcome to Outer Blue Talks Research. Knowledge sharing on financial research.

• Swaha Patnaik

  Hello and welcome to this Amundi podcast, which is part of the research series where we deep dive into some of the big macroeconomic and investment issues that our experts are working on. In today's episode, we will look at asset allocation through a slightly different lens and on a somewhat longer time horizon than usual. Our discussions today are about retirement portfolios and specifically lifestyle investing, which aims to offer a glide path to those halcyon days where we all hope we'll have more free time and sufficient retirement funds to make the most of that extra leisure time. I'm Swaha Patnaik, the Head of Publishing and Digital at the Umundi Investment Institute. And it's my pleasure to welcome Dominic Byrne, the Global Head of Retirement Solutions at Amundi. Thanks for joining us, Dominic, and great to have you here.

• Dominic Byrne

  Hi, and great to be here. Excited to talk about retirement investing for the next 10-15 minutes.

• Swaha Patnaik

  Fantastic. So, lifecycle investing has been around for a while, but maybe we should start. With a brief explanation, Dominic, of what it is and also how it's evolving.

• Dominic Byrne

  So I think when we think about lifecycle investing as an industry, it's not new. There's been lots of academic research on this. It's driven a lot of investment design for defined contribution plans in many markets. And it really thinks not just about how do we think about an asset allocation at a point in time or for a specific risk and return object. But how do we evolve that asset allocation over time to reflect people's changing dynamics as they go through their working life? So as they start working, as they enter work and then progress from prepare for retirement all the way through retirement. So it's a really important topic for retirement investing, particularly in a world where we're seeing increasing risk being put on to individuals. either through workplace defined contribution pensions or individual pensions where they don't have a government or a company to offer them a guaranteed pension so they're actually required to take that risk on themselves and they don't often have an advisor to tell them how to invest how to change their investment so life cycle investing tries to think about that allocation over time to prepare us as we go to our through our lifetime and then into retirement

• Swaha Patnaik

  So traditionally, life cycle investing is decomposed into sort of what's called human capital, which is sort of the capital that you are putting in as a human, if I can really simplify it, and the present value of all the total future contributions, pension contributions that an individual is going to be contributing to their pot. Now, as our listeners will understand, this starts off as a large amount when you have decades and decades of work ahead of you. And then, diminishes over time as you have fewer and fewer years to retirement. The second element, Dominic, is really interesting because that's the one you can help in your teams with, which is the financial capital. Now, let me just go into one question I have about the traditional mix, which was equities and bonds. And this is sort of the returns you're getting from these holdings are going to make up your financial capital at the end of the day. We've seen in recent years a bit of a breakdown in the traditional correlations in bonds and equities. We've also seen volatility sort of expand well beyond the traditionally risky, so-called risky assets of equities into bond markets. What impact has that had on the mix that you're looking at and how you, your teams, think about the glide path?

• Dominic Byrne

  Excellent. So, yeah, I'll take a few of those items. I think the first one you mentioned is really important. So it's just... the consideration not just around an individual's financial assets, so the stocks and bonds that they own, but also their human capital. So that's our savings. So the contributions that we get through working, through salaries, etc. And that's important because that's a major driver of the overall retirement outcome. And so it starts to differ when we talk about a traditional asset allocation where you might just look at that stock and bond or alternatives portfolio. You need to think about this contribution element and that's really what we mean by human capital and there's decades of academic research on this. Amundi itself published papers recently through the Investment Institute talking about how important that is. And we touch on that in the paper. We also expand, though, on the investment component. And you talked about stock-bond correlation. And so thinking about not just investing in a stock portfolio or a bond portfolio, but introducing additional assets into that mix to help us have a more broader toolkit when we're thinking of diversifying our portfolio over time. Because when we talk about lifecycle investing, we introduce a concept called the glide path and the glide path is borrowed from aviation and it talks about how a plane can be in the air and gently glide onto the runway to get people home safely similarly in retirement investing we have a large amount of equity portfolio investments risky asset investments then how do we adjust that portfolio over time to get you into retirement and we do that by adding bonds and other assets to diversify. Now, yes, it's true that in periods that stock bond correlation rises and so the traditional benefits of diversification are eroded. We can't mitigate that entirely through a life cycle approach. We're still exposed to those dynamics. But what we are seeing in modern retirement investing is introducing more breadth into the portfolio, different assets, not just government bonds, but other types of bond markets, liquid or alternative investments. And then also introducing areas of dynamism into the portfolio. So not simply just setting and forgetting that portfolio and coming back after 50 years and hoping everything's all right, but having a more dynamism in the allocation as well.

• Swaha Patnaik

  Thank you, Dominic. You mentioned this element of breadth in the portfolio. It sort of picks up on what we talk about in some of the normal convictions podcasts that we do on a much shorter term sort of horizon where the diversification has become increasingly important. Can you sort of talk us through what sort of diversification options there are and how that illiquidity issue plays out?

• Dominic Byrne

  Yeah so if we if we think about I mean and paper talks about this we actually think about an individual's total wealth and their different risks that they face in retirement you know they have first of all they need to get access to a pension plan or a savings vehicle and that means that once they get that access that's the principal risk that they mitigate so that's really good you've got access that's one risk to think about secondly then you need to think about well your horizon and so when we're talking about diversification we often think about capital preservation risk reduction but if i have a multi-decade horizon i actually probably just want to generate more returns and in order to do that i want to have as many return engines in the portfolio. And for lots of people, particularly here in Europe, they've never invested in the stock market before. And actually they have lots of money and very safe investments. So for them, just introducing equities in the portfolio as a long horizon investment is something new and something that's important. And we're seeing a lot of focus on this globally around how do we get younger people in particular into investments that have a similar horizon. Now, once we start talking to more larger investors or more sophisticated investors who are very familiar with stock markets, but need to build these intergenerational funds such as lifecycle strategies, they're thinking about, well, let's look beyond the public markets and going into the private markets. And once you start looking at the private markets, you have a natural alignment with investment horizon for a retirement investment strategy. So, for example... Private equity, infrastructure projects, long horizon assets, generating returns over a longer period, a nice complement to stocks and also alignment with horizon, particularly for younger people. And so we're not just talking about diversification in the capital preservation sense, we're actually talking about broadening the toolkit to generate returns, particularly for people with multi-decades of horizon.

• Swaha Patnaik

  Thank you. And we keep referring to this paper, but... But Dominic's team, in conjunction with some of the institute experts, have written a paper on this glide path. So the paper we keep referring to is on the research centre. You can search Amundi research centre and you will find it if you search for glide path. I mean, this paper, as I was saying, also does some stress tests for different scenarios when you incorporate these private assets, less liquid assets. And the returns... turned out under the various scenarios to be pretty competitive actually.

• Dominic Byrne

  Yeah, I mean, I think, you know, when we think about any solution of design, we want to have a quantitative grounding in what we expect the portfolio to be able to do. And particularly for retirement investing, that's really important because, as I said earlier, the risk now is on the individual and the outcome is a function of that individual's portfolio and their savings. And then at the end of it, that's what they get to fund their retirement. So really important that we have a quantitative grounding and understanding. Now, what we're doing when we think about these simulations is an estimation. And it's including forward-looking forecasts, projections across different markets. So in the results that we do, and this is indicative of how we work with retirement portfolios at Amundi, we're not just thinking about what the average outcome would look like, but we're also thinking about what it would look like in a particularly bad case. That's really important for portfolio construction, but it's really important for retirement. And the reason being is that we don't often get to choose when we retire. we might need those assets in a period where the markets are really bad or returns have been particularly unfavorable. So we can't just say we're going to get the average. We need to think about what we might get in the worst case scenario. So this is strong, robust portfolio construction, but it's also very valuable for retirement investing because we're not choosing the time. when we might need those assets. So we have to think about the distribution of the outcomes rather than the average.

• Swaha Patnaik

  That's really clear. But you're picking up on something that I wanted to ask you about in the terms of how people's working lives, career arcs have changed in the last 15, 20 years. There's no longer you stay at the same company, you work your way through or gradually progressing to a higher and higher, you know, salary, and then you retire with your gold clock. It's become more about career breaks, switches, pivots to new careers, where you may be taking a salary cut to do something you absolutely passionately enjoy, sort of mid-career that you've decided. How is this glide path approach taking this into account, especially as we all work longer and longer?

• Dominic Byrne

  Yes, I mean, we're touching on a really other important element. Actually, we've talked about lifecycle investing, glide paths. We've talked about private markets. And really the other big theme that we're hearing from clients and the industry is about personalization. And really personalization is a natural byproduct of requiring more individuals to either save more for retirement or be responsible for the risk of their retirement outcome. And when we think about glide paths, you know, you think, well, actually that is a personalization tool in itself because it's thinking about age, it's thinking about risks, and it's thinking about how they evolve as an individual evolves over time. But there's also an increasing requirement to think about different patterns of our working lives, as you described, and also different cohorts or different preferences within a large population. And that's important because some people might follow a traditional path of employment, they might follow a traditional path of contributions, others might have breaks, or others might have very different risk appetite or total financial assets. that might mean they might want to be different than the average. And so what we're thinking about or considering more and more is, does the retirement solution that drives either the pension or the retail savings proposition truly reflect the customers that are investing in it or the people that are investing it on the other side? And secondly, if it doesn't, or if it doesn't capture a huge amount of that population, how then do we evolve and make changes? and it might not be to say that you know you have to move your portfolio around a lot you might have to you know switch or change you might offer them a different path for those people that don't necessarily capture the average so it's a very very important point and it's very linked to data because you can't really to make a judgment on what your population is doing unless you have information around them and then you can't make a judgment on what the different preferences are unless you start thinking about how they've behaved in different scenarios or what the data we have on them. So that's a lot where the technology aspect comes in, which we touch on in the paper as well. And this is something that we're seeing a huge amount that, you know, mass personalization, tailoring mandates and better understanding of the individuals that rely on that pension saving ultimately to fund their retirement.

• Swaha Patnaik

  And as soon as you start talking about large amounts of data having to personalize, my brain turns to AI and thinking, are your... teams? Is the industry using more and more AI to deliver this passing of large amounts of data and to be able to give you this person resembles this cohort of the population more? How does it work?

• Dominic Byrne

  Yeah, absolutely. I think, you know, the incorporation of data techniques, incorporation of AI is definitely going to be a big part of the future. to be something that's already been looked at and we talk about that we've done some research at monday on how that can help and it's going to be more and more important and it's really about understanding is what we're offering today relevant and useful do I need to make some changes or additions? And the more we can do that, and the more we can do that with confidence and quicker, you know, the more compelling these propositions will be. So I think, yeah, we're just seeing the start of the use of AI in retirement offerings, but it's definitely a trend that we see to accelerate over time.

• Swaha Patnaik

  Okay. So let me take the metaphor that we're using on glide path. It's usually applied to planes when you're trying to get the glide path, land safely, no bumps. But in the current case, we're almost in a situation where the plane is being flown and the engines are being changed as you're flying the plane because the regulator keeps changing the rules as they try and get fiscal sustainability issues tackled. So, I mean, how difficult is it to keep adjusting to the regulation changes, which are important as people live longer, have to work longer or the security, as you say, of the pension is being more and more increasingly sort of passed to the individual on the risk basis rather than the government.

• Dominic Byrne

  Yeah i was getting a bit nervous with the analogy that i hope there's no crashes yeah no exactly i think you're right i mean the the interaction between regulator uh you know the realities of operating models um are a very very important part i think and it's really how we think about it at Amundi we don't just think of the most theoretical or kind of purest way of doing lifecycle investing. Actually, the first stage is we think about what's the regulatory environment? What does the actual solution serve within the ecosystem? And that's important because you've got government pensions, workplace pensions, private pensions. How does it sit within that? And then finally, what does that look like over the next coming years? There's no point designing a strategy if the... the regulation is about to change and then before we have to come back and change the strategy again so really really important point and we see an increasing focus from regulation from government policy from from different countries to think about this problem so we know the auto-enrollment for instance has been adopted by a number of countries and there's a natural linkage between auto enrolment and glide paths and we expect that to increase. increase and thinking about, you know, how if an individual defaulted into something automatically enrolled, it makes sense that they're automatically adjusted over time. So this is increasingly growing. So I think, you know, the point on regulation operating model is very, very important. And actually, one of the starting point of any retirement discussion for us with our clients and the way that we think about, you know, building portfolios of people.

• Swaha Patnaik

  Thank you, Dominic. So you mentioned that we generally don't want to stay at the theoretical. You get very, very practical in this thing. In this podcast, generally, we're talking about macroeconomics, big asset allocation, investment decisions, but pensions are so practical grounded. So I'm going to take the opportunity to ask you a few very practical questions. Now, I preface this by saying none of this is investment advice for any of our listeners. But I wanted to ask you, I mean, the advice on retirement is always you can't start too early. Okay. How did you, when did you start to contribute to a pension say and you know you're in charge of pension solutions, how did you approach your pension things when you were much younger, I'm assuming you were much younger and how is it evolving?

• Dominic Byrne

  Yeah I mean I think you know I think I was lucky enough to work in different countries and have different companies and unfortunately you know the benefits of those companies allowed you to save into a pension so that was that was helpful. because it meant that I wasn't making that decision for myself. I think recently we're lucky enough to have two young children. You can use various junior savings accounts if you're fortunate to be able to access them. So I think I do advocate for starting early. However, I come up with this increasingly when you're going around the different countries and talking to different clients. Keeping retirement out of retirement discussions is quite important. People don't really have a view of what their life's going to be like when they retire and other people are in denial that they might never retire and want to work and that's fine. So it's almost about financial planning and thinking about retirement investing in the context of wealth management and financial planning and that's really I think important. So you know if you look at my portfolio is it a purely index portfolio, is it an active portfolio? It's a bit of both, but it's sort of separated around those different financial goals. Do I wish I'd saved earlier? Absolutely.

• Swaha Patnaik

  I think we all do.

• Dominic Byrne

  You know, you can't live in the past, you've got to move forward, etc.

• Swaha Patnaik

  Thank you very much, Dominic. So moving back to the sort of, you know, slightly more theoretical, going back to the paper, is there one takeaway that you think? you know, our listeners should really, really look out for in this paper, should they, if they don't go look at it, that you would like them to take away?

• Dominic Byrne

  Yeah, I mean, I think the first, you know, the clue is in the title, you know, we call this the life cycle remix. And there's a lot of old and very strong academic papers, there's a lot of ways of being doing this that have established for many, many years. We truly believe at Amundi that retirement investing is going through a remix. In this paper about the accumulation of assets, the need to broaden the toolkit, and it's driving personalization, we've literally just scratched the surface. You know, future podcast episodes, I hope, will cover the accumulation and retirement income, the innovation that we're seeing in different pension markets to help people generate an income for life. And we truly believe that this market is being remixed. And it's not being remixed because old things are wrong. It's being remixed because, as you mentioned, regulation. Dynamics, demographics are changing the landscape. So hopefully people can think that this is a way of rethinking what they're doing and what they're doing might be perfectly valid. And then the second thing is around being flexible and being practical around how we operate. We talk a lot about private assets, the fantastic investments that they offer us, but they're not for everyone. and they also require a lot of operational aspects which we think we can help clients with but equally i talked about those clients have maybe never invested even in the stock market before that's a really exciting innovative tool that they can get access to so we're thinking here about remixing we're thinking about rethinking um but also um you know this is a a very exciting and global area. Lifecycle investing. I have never known it being a topic in so many client conversations across so many countries, Latin America, Asia, Europe. But there's a lot of other things for us to consider as well. So hopefully that comes across in the paper.

• Swaha Patnaik

  Perfect. Dominic, thank you so much for joining us. You've given me the absolute carte blanche to make you come back to the studio again. So we shall. We look forward to seeing you again. But thank you for coming in today.

• Dominic Byrne

  Thank you. And thanks, everyone, for listening.

• Swaha Patnaik

  Absolutely. My thanks added to Dominic's. Do tune in for our next research podcast and the regular convictions podcasts. And please have a look at the paper if you want to know more. It's on the Research Center.

• Speaker #0

  This podcast is only for the attention of professional investors, as defined in Directive 2014-65-EU. dated 15 May 2014, as amended from time to time on markets and financial instruments, called MIFID II. Views are those of the author and not necessarily Amundi Asset Management SAS. They are subject to change and should not be relied upon as investment advice, as a security recommendation, or as an indication of trading for any Amundi products or any other security, fund units, or services. Past performance is not a guarantee or indicative of future results.