As the superannuation industry is in its relative infancy, a lot more work needs to be done on developing reliable income streams for people in the post-retirement phase, according to Legg Mason.
Its new research paper, Rethinking portfolios for retirement, argues the traditional method of allocating 70 per cent of a portfolio to defensive assets will not be sufficient to sustain an income in retirement.
Rather, retirees will require the bulk of their investment return to come from yields, according to chief investment officer for Australian equities and co-author of the paper, Reece Birtles.
He suggests allocating capital to real assets like property, utilities and infrastructure, rather than relying almost solely on defensive assets.
“High income Australian equities also provide a solution as they boast unique income characteristics in the form of franking credits,” Birtles said.
These are especially useful for boosting overall returns for retirees who have a zero per cent tax rate.
But Birtles said that retirees should stick to companies with low capital expenditure requirements and a strong cash flow, such as domestic brand names.
In response to these requirements, Legg Mason has built both the Real Income Fund and the Australian Equity Income Trust, both of which are open to wholesale investors.
The Real Income Fund was launched in December 2010 and concentrates on listed hard assets, including Australian real estate investment trusts, utilities and other infrastructure such as electricity, gas grids, toll roads, airports and hospitals.
The Australian Equity Income Trust, due to be launched at the start of June, will invest in listed companies on the Australian stock exchange that achieve attractive, reliable dividends.
