Global demographic shifts are increasingly under the spotlight, and investment professionals and investors alike are having to think about what this means for their portfolios.
For a while the demographic shift of people living longer and having fewer children has been associated with Asian countries such as Japan, South Korea, and China, as well as parts of Southern and Eastern Europe, but it’s becoming clear that most countries are going through this shift, including many emerging market countries.
Since the 1950s the global total fertility rate (the average number of babies born per woman) has fallen from 5 to about 2.3. This is close to what is known as the replacement rate of 2.1 (the fertility rate required for the population to remain stable over time), and many countries are well below that.
According to United Nations data for 2023, Italy (1.3), Japan (1.3), and China (1.2) are well below the replacement rate, but emerging economies such as India (2), Bangladesh (1.9), and Iran (1.7) are also below the replacement rate (South Africa is at 2.3).
Many of the countries with the lowest fertility rates also have the highest median ages, based on Central Intelligence Agecny (CIA) figures: Japan, Germany, and Italy all feature in the top 10, though India (143rd), South Africa (144th), and Bangladesh (145th) still have young populations. It’s clear, though, that for most countries, median ages will continue to rise.
Reassessing the old models
As these trends deepen and societies continue to grow older, so the traditional models for pensions and other forms of contractual saving will need to be reassessed. Much of the industry is built on the idea of inflows coming from the incomes of younger workers, which then provide the base for the drawings by older retirees.
However, as the proportion of younger, working-age investors and pension fund members falls and the number of retirees grows (and live longer) so the ability of traditional retirement vehicles to support retirees diminishes.
Policymakers around the world are having to grapple with these problems and find solutions, including potentially raising the retirement age of workers.
At the same time, advisers and their clients will also need to re-examine their approach to questions about risk and asset allocation. Given longer lifespans, is it right to de-risk portfolios as investors approach retirement and immediately thereafter? And should investors look to keep a higher weighting in equities at a time when the textbooks tell them to increase their weighting in fixed income, cash, and high-dividend-paying equities?
Instinctively, many investors will want to reduce equity exposure as they approach retirement, but this may not be the best approach if they have a longer life to look forward to in their retirement. Investors will need to look for ways to grow their capital.
Structured products: an investment for managing the demographic shift?
In this environment, structured products have a key role to play. In recent years, investors have been drawn to this particular alternative asset class as an excellent way to reduce volatility in their portfolios in the years just before and after retirement. This is an especially pertinent issue at the moment, with many of the world’s leading indices, including the S&P 500, Nasdaq, Nikkei 225, and Eurostoxx 600, hitting record highs. Structured products can be an excellent tool for hedging the risk of a market sell-off while also allowing participation in the upside.
However, structured products can also help investors to negotiate the tectonic demographic shifts discussed above. By incorporating structured products into portfolios well into retirement, investors have a way of managing their risks while also continuing to participate in equity market gains in the future.
Of course, such will depend on the design of products and the underlying investments chosen as reference, as well as the liquidity needs of the investors over the term of each structure (remember, structured products don’t pay dividends).
In conclusion, while demographic shifts look set to disrupt traditional retirement planning, structured products could play an increasingly important role in helping investors make the transition to the new retirement world.
Speak to your financial adviser for more on retirement planning
About the latest Investec structured product: The Global Accelerator offers 140%* geared exposure to world equity markets in US dollars up to a maximum return of 56% over the term of approximately five years. 100% of investors’ initial capital is protected at maturity (subject to credit risk). Investec is the promoter of the Global Accelerator.
*Indicative (the gearing is dependent on market conditions on trade date).
Learn more here.
Applications close on 21 May 2024.
The point is well taken. However, the level of protection ie original capital protected, is of limited value for a period of 5 years and where the investment return opportunities are relatively high. For example at 5% inflation and a real return of 2% pa, the opportunity value of the original capital will have lost 40% of its real value after 5 years. Better than nothing, but few investors with a diversified portfolio are at risk of losing 40% of its value. What would be the cost of “high water mark” protection – with the value of the protected capital re-based regularly, annually or perhaps more regularly?
Good day.
Investec’s response is as follows:
“The Global Accelerator offers capital protection and exposure to world equity markets. If the equity market return is negative after five years, the investor has 100% of their initial capital protected. It is true that the value of the initial capital will be worth less in five years in real terms due to inflation (U.S. inflation is currently 3.2% p.a.). However, the alternative is to invest directly into the equity market where a negative equity market return would result in an investment value that is less than the initial capital in absolute terms and worth even less in real terms due to inflation. It is possible to provide capital protection through inflation-linked bonds but this would be more expensive and result in significantly less participation in the growth of the equity market on the upside.”