Comment | Con Keating
Does DC ‘life-styling’ make sense? Con Keating
con2.keating@
brightonrockgroup.co.uk
Con Keating is head of research at BrightonRock Group
This month Con Keating looks at portfolio construction for mem- bers nearing retirement and he doesn’t like what he finds.
In the course of recent work on value-for-money metrics, I came across several schemes which apply ‘life-styling’ to older members. Many have argued that these strategies merit a benchmark which differs from the traditional 80/20 equity- debt construction, which reflects the overall fund market capitalisation or available investment opportunity set.
The heart of a value-for-money metric is a cost- benefit or input-output comparison. In the case of defined contribution (DC) funds, the inputs are the contributions made and their timings,
16 | portfolio institutional | October 2019 | issue 87
while the output is the market value of the fund at measurement date. This delivers the actual performance as an internal rate of return (IRR). An IRR is a risk-experienced average return. It has experienced the good and bad times of mar- ket behaviour over the period of saving. This ren- ders otiose the confusing discussions of risk management, and the role of risk in the risk-re- turn equation.
This requires a little explanation. One of the few things we know about risk is that it means more (bad) things may happen than will. The essence
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