Michael Elsworth, Executive Director at Lonsec, joins us to discuss retirement income strategies during volatile markets, including his investment philosophy, the benefits and risks of different retiree income strategies and the advantages of combining income streams during times of uncertainty.

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8. Retirement income
strategies during
volatile and uncertain
markets
Page
7

9. Page 8
Disclaimer
Important Notice: This presentation is given by representatives of Lonsec Investment Solutions Pty Ltd ACN: 608 837 583, a Corporate Authorised Representative (CAR number: 1236821) (LIS) of
Lonsec Research Pty Ltd ABN: 11 151 658 561 AFSL: 421 445 (Lonsec Research) to wholesale clients only (within the meaning of section 761G of the Corporations Act 2001 (Cth)). By attending
this presentation you are representing that you are a wholesale client. This presentation has been prepared without taking account your objectives, financial situation or needs. Before making any
investment decisions you should read the relevant product disclosure statement and obtain advice from an appropriate financial adviser. LIS creates the model portfolios it distributes using the
investment research provided by Lonsec Research but has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec
Fiscal Holdings Pty Ltd ACN: 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this presentation.
Disclosure at the date of publication: Lonsec Research receives a fee from the relevant fund manager or product issuers for researching financial products (using objective criteria) which may be
referred to in this presentation. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.
Lonsec Research receives fees for providing investment consulting advice approved product lists and other advice, to clients. LIS receives a fee for providing the model portfolios to financial
services professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec
Research may hold any financial product(s) referred to in this presentation. Lonsec Research’s representatives and/or their associates may hold any financial product(s) referred to in this
presentation, but details of these holdings are not known to the analyst(s).
Warnings: Past performance is not a reliable indicator of future performance.
Disclaimer: This presentation is not intended for use by a retail client or a member of the public and should not be used or relied upon by any other person. No representation, warranty or
undertaking is given or made in relation to the accuracy or completeness of the information presented in this presentation, which is drawn from public information not verified by LIS. Financial
conclusions, ratings and advice are reasonably held at the time of completion (refer to the date of this presentation) but subject to change without notice. LIS assumes no obligation to update this
presentation following publication. Except for any liability which cannot be excluded, LIS and Lonsec, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in,
misstatement or omission from, this presentation or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.
Copyright © 2018 Lonsec Investment Solutions Pty Ltd ACN: 608 837 583

10. Page 9
Our Philosophy and Process
We believe in…
• Diversified portfolio approach
across asset classes and
investment strategies
• Top-down & bottom-up analysis
combined with quantitative
stress testing
• Strong focus on risk
management. Investors have an
asymmetric risk tolerance, fear
losses more than gains

11. Our investment philosophy
Page 10
Source: Lonsec

12. A framework for building Retirement portfolios
• Recognising two objectives in retirement: Growth & Income
• Focusing on managing risks specific to the retirement phase:
• market risk
• inflation risk
• longevity risk
• sequencing risk
• A diversified functional approach i.e. not skewed to one factor such as yield or capital
preservation
Page 11

13. Portfolio Building Blocks
Page 12
• A building block approach forms the basis of every portfolio we build
• Fundamental analysis combined with quantitative models tested through a range of market conditions
Fundamental bottom-up analysis
Alpha
Growth
Beta
Yield
Risk
Control
Risk
Control
Accumulation Portfolios
Retirement Portfolios

14. Retirement Portfolios
Page 13
Objectives based
• Generate sustainable level of income, not outperform an index
• Management of drawdowns more critical
Certainty
• Retirees crave certainty
• Evidence that retirees are self-insuring against longevity risk
Different to Accumulation Portfolios
• Retirement portfolios need to be managed differently to accumulation portfolios
• Managed to mitigate different risks - income level risk, inflation risk, income volatility risk

15. Portfolio Construction
Page 14
Advice Is Key
Age Pension
Retirement Products
Account Based
Pension
Discretionary
Spending
Essential
Spending
• Australian Equities
• Global Equities
• Fixed Income
• Property
• Alternatives
• Cash
Account Based
Pension
Retirement
Products
Age
Pension

16. Retirement Products as part of a Portfolio
Page 15
No Allocation
30% Funded from
Defensive Assets
30% Funded Pro-Rata
Australian Equities 25% 25% 17.5%
Global Equities 25% 25% 17.5%
Property & Infra 10% 10% 7%
Fixed Interest 35% 5% 24.5%
Cash 5% 5% 3.5%
RETIREMENT PRODUCT 0% 30% 30%
Total PORTFOLIO 100% 100% 100%

19. Future Safe
Page 18
• Protection
• Growth
ASX 200 Accumulation
MSCI World Unhedged
• Income
• Flexibility
–10% floor
–5% floor
0% floor Fixed Rate
Cap:
Max. Gain
Floor:
Max. Loss
Source: Allianz Retire+

20. Risk Mitigation
Page 19
Sequencing risk – income streams can be severely impacted
by the timing of negative investment returns, particularly early
in retirement.
Longevity risk – increasingly important as life expectancies
have increased.
Market risk – Investors will need to take on market risk to maximise chances of meeting
long-term investment goals.
Inflation risk – the purchasing power of income streams can be eroded over the longer term
by inflation.
Interest rate risk – particularly relevant if retirees are using term deposits.

21. Advantages
Page 20
Guaranteed Payments
Annuities provide a guaranteed payment, paid over an investor’s lifetime.
Annuity payments are contractual obligations of life insurance companies. Capital is pooled in
statutory funds and monitored by APRA.
Downside Protection
Protect against equity market volatility when you need it.
Flexibility
Investors can select inflation indexed annuities which preserve income stream purchasing power.
Choice of underlying markets for Future Safe.
Enhanced liquidity with products offering capital withdrawal periods.
Guaranteed death benefits for beneficiaries.

22. Disadvantages
Page 21
Opportunity cost – retirees forgo the opportunity to potentially earn better returns in the
future.
Liquidity risk – capital is not always able to be accessed, though new features provide
greater flexibility but involve trade-offs.
Credit risk – annuitants are exposed to the creditworthiness of the statutory fund of the
insurer. The capital adequacy of insurance companies is monitored by APRA.
Transparency - fees may be quoted as an explicit cost in the case of annuities.

23. Thank You
Michael Elsworth
M +61 407 295 901
michael.elsworth@lonsec.com.au
Level 7
90 Collins Street
Melbourne VIC 3000
lonsecresearch.com.au

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