THE THREE NEEDS AND THREE RISKS FOR RETIREES CHAD PADOWITZ CFA - CIO TALARIA - FSITV
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The three needs and three risks for retirees
Chad Padowitz CFA – CIO Talaria
Contents
• Retirement investing is different
• How income is impacted by needs and risks
• A unique solution to the income problem
2Important information
Wholesale Clients Only. The information contained in this presentation is made available onlyfor persons who are wholesale clients or sophisticatedinvestors within the meaning
oftheCorporationsAct2001(Cth).Itmaynotbedistributedorreplicated in any form, to anyone who is not a wholesale client or sophisticated investor in Australia.
No Reliance. This document is produced by Talaria Asset Management Pty Limited (Talaria) ACN 130 534 342, AFS Licence No 333732 and based on information available at
the time of the presentation. The information herein is factualand believed to be accurate as at the time of the presentation.
Illustrative information only. This presentation is not, and is not intended to be, an offer or invitation for subscription or sale, or a recommendation, with respect to any
financial product discussed herein, nor is it to form the basis of any contract or commitment. Such an offer would only be made by distribution of an offering memorandum
relating to any such financial products offering recipients of this presentation should therefore place no reliance on the content of this presentation when making any
decision to invest. Any examples or information provided in this document are for illustrative and discussion purposes only and do not represent a recommendation or
Talaria’s view on future events and in no way bind Talaria. The presentation and this document do not purport to be a complete statement or summary. The Talaria Global
Equity strategy is available through the Talaria Global Equity Fund (Fund) Wholesale Units ARSN 132 393 705. The Fund is issued by Australian Unity Funds Management
Limited ABN 60 071 497 115 AFS Licence No. 234454. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the Fund’s Product Disclosure
Statement (PDS) and consider whether the product is appropriate. A copy of the PDS is available at the website australianunity.com.au or by calling the Client Services team
on 13 29 39.
This presentation is confidential and should not be distributed by the recipient in whole or in part to any other person without obtaining the prior written consent of Talaria
Asset Management Pty Limited.
© 2020 Talaria Asset Management Pty Limited
3Markets and economies have shifted
FAANMGs bigger than entire Japanese Stock Market
Apple’s market cap greater than FTSE100
US 10-year Treasury Rate 0.74% v long term average of 4.43%
Company dividends down 20-40%
Australian GDP – 7% for the June quarter
AU Gov’t Stimulus $289bn+ …
Sources: Bloomberg, Fairfax
4Retirement investing is different
Retirement investing is different
To achieve the 3 big retirement needs...
Retirement Needs
Income Growth Certainty
The 3 key risks need to be avoided
Income level risk Inflation risk Volatility risk
Longevity Above inflation growth Sequencing
6Adviser conundrum
• Advisers face a structural mismatch
Change In Importance of Investment Outcome Risk Over Time
• Clients seek income but industry
offers capital solutions
• Accumulation products vs.
Relative Importance
Retirement products
o As investors transition to
retirement capital protection
becomes more important
Accumulation Late Stage Accumulation Retirement
Age
Relative / Opportunity Cost Absolute
7Income adequacy
ASFA Standard Comfortable Annual Spending Needs
• Is the ASFA standard
enough? $80,000
Retirement Needs
$60,000
• What level of
savings do you need $40,000
to achieve it?
$20,000
$0
Single Couple
($20,000)
($40,000)
ASFA Standard Pension Shortfall
Sources: Google, ASFA, ATO
8Dividends (income) have played the key role in total returns
Retirement Needs
Source: Bloomberg
9So retirees require
▪ Capturing the market’s gains, less of its
declines
▪ Lower volatility – smoother journey
▪ Consistent income generation - a buffer
against loss
10How income is impacted by needs and risks
Risks: Inflation, concentration and duration
Retirement Needs
Source: Bloomberg, As at 25.9.20
12Valuation (duration) risk
Top 10 Index P/E
1 Year Performance - July 2020 Performers* Ratio
Retirement Needs Apple 35x
Amazon.com 71x
Top 10 Index Other 1,529 Index Total MSCI World TALARIA Microsoft 34x
Performers Members (ex Aus) Index MSCI VALUE (pre-fees)
10% Tesla 192x
6.4%
NVIDIA 55x
5% 3.4%
Alphabet 29x
0% Facebook 30x
-2.1%
-5% -2.9% PayPal Holdings 56x
-10% Shopify 547x
Adobe 48x
-12.3%
-15%
Avg. P/E Ratio 49x
Based on 12 month return to 31 July 2020. Source: Bloomberg,
*Index as at September 2020, Avg. P/E Ratio based on harmonic mean
13Traditional portfolio construction (60/40) is broken
Traditional income
sources are no longer
offering the same
returns…
There are more cuts to
come.
The result: Ongoing
uncertainty ahead!
Source: Bloomberg, Talaria
Talaria Yield based on 12-month Distribution Return as at 31 March 2020 for Talaria Global Equity Fund – Wholesale Units
15Lower returns ahead, new tools needed
The Dividend Swap Market shows an anticipated further decline in dividends is
being priced for 2021 v 2019 levels
0%
-10%
USA Europe
–20% –20% Australia
-30%
-20%
-30%
-40%
Source: Bloomberg, As at 25.9.2020How much do you need?
▪ Massive problem for
retirees today.
▪ US$1 million no longer
generates a US$50,000
income for
retirement.
▪ Today, it is just
US$6,900 p.aHow much do you need?
▪ Need closer
to US$
8millionA unique solution to the income problem
What are the other income sources?
Genuinely uncorrelated, persistent proven income
• Banking / Shadow banking
• Catastrophe insurance
• Equity insurance
20Getting paid for taking risk – An Insurance Mindset
A different approach to buying shares
Typical insurance premiums
Turn ‘theoretical’ return into ‘real’
return
Life
o
Insurance
Consumers pay to protect
homes, lives, cars
0.1% p.a .
o Insurers receive the premium for 0.3% p.a .
accepting risk
So, what about investors?
2.5% p.a . Sha res???
Insurance premium costs based on estimates provided by insurers. Share market insurance defined as annualized return on near the money American put options.
Past performance is not a reliable indicator of future performance.Getting paid for taking risk – An Insurance Mindset
A different approach to buying shares
Investors pay 15-20%+ p.a. to protect Typical insurance premiums
shares.
Life
o Generates income Insurance
o Diversifies sources of return
0.1% p.a . 0.3% p.a .
o Creates buffer against loss
Selling Put Options = Selling Insurance on
Shares
2.5% p.a . 15-20% p.a.
Insurance premium costs based on estimates provided by insurers. Share market insurance defined as annualized return on near the money American put options.
Past performance is not a reliable indicator of future performance.EQUITY INSURANCE EXAMPLE
Trade on offer: Sell August 2020 Put
Available Trades:
Maturity date Oct 2020
Date: August 2020
Share Price ($): 68.13
Strike Price ($): 62.50
Source: Talaria, Bloomberg
For illustrative purposes only and not a recommendation to buy or sell a particular stock
23EQUITY INSURANCE EXAMPLE
Trade on offer: Sell August 2020 Put
Available Trades:
Maturity date Oct 2020
Date: August 2020
Share Price ($): 68.13
Strike Price ($): 62.50
Option Price (Premium $): 2.17
Annualised Option Premium Return: 22.17%
Source: Talaria, Bloomberg
For illustrative purposes only and not a recommendation to buy or sell a particular stock
24EQUITY INSURANCE EXAMPLE
Trade on offer: Sell August 2020 Put
Available Trade:
Maturity date Oct 2020
Date: August 2020
Share Price ($): 68.13
Strike Price ($): 62.50
Option Price (Premium $): 2.17
Annualised Option Premium Return: 22.17%
Total Buffer To Loss ($): 7.80
Total Buffer To Loss (%): 11.5%
Dividend Yield: 6.20%
Price / Earnings Ratio: 5.7
Source: Talaria, Bloomberg
For illustrative purposes only and not a recommendation to buy or sell a particular stock
25Consistent income from diversified sources
We generate consistent income as part of the total fund return.
This comes from a variety of sources creating more stable returns to investors.
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-2.0%
Option Premium Interest Dividends Annualised
Source: Talaria, 2020 reflects calendar year to September 2020
Option premium generated is on capital account and is therefore not always distributable.
26Consistent income from diversified sources
Historically higher distributions than both domestic and foreign industries.
Talaria Global Equity Fund distribution calculations based on the distributions paid in each financial year, using financial year starting values to determine annual distribution yield to June 2020
S&P/ASX 200 and MSCI World (ex Aus) Index (MXWO) Dividend Yields = 12mth DY. Source: Bloomberg
Sources: Bloomberg, FactSet,Talaria
Numbers may not sum due to geometric compounding and rounding. Past performance is not an indicator of future performance
27Consistent income from diversified sources
Enjoy a smoother ride to the end result, less volatility is always better
Standard Deviation
(Rolling 3 year, annualised quarterly returns)
14%
12%
10%
Structurally lower
8% volatility than
broader market
6%
4%
Benchmark Talaria
2%
0%
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
Source: Talaria, Bloomberg
Based on quarterly returns of Talaria Global Equity Strategy (Foundation Units) (pre-fees) January 2015 – July 2020
Past performance is not an indicator of futureperformance
28So retirees require
Retirees need an alternative and more stable source of income
generation now.
Retirees need less volatility to enjoy their retirement.
Retirees need to diversify their sources of return.
There is a solution that creates greater retirement certainty.
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