Why Retirement Portfolios Continue to Attract
Portfolio Manager Chris McHaney explains how retirees can use BMO Retirement Portfolios to thread the needle between low yields and high volatility.
April 2021
Key Takeaways
- Designed specifically for clients in decumulation phase
- Option overlay provides insurance against market drawdowns
- Provides growth potential with a smoother return path
BMO Retirement Portfolios share a common structure, yet they appeal to different risk preferences. What are the similarities and differences?
CM: There are three BMO Retirement Portfolios – Income, Conservative and Balanced – which are built on the same three core pillars. One, an active fixed income sleeve that manages duration and credit exposure. Two, the BMO Risk Reduction Equity Fund, which adds exposure to the equity market while creating a smoother return path. And finally, a global equity sleeve that invests primarily in low-volatility stocks from around the world. The differences across the Portfolios are simply how much we allocate to each pillar, which in turn allows investors to choose the solution that is appropriate for their specific risk and return requirements.
Can you describe the performance investors can expect from these strategies relative to other investment solutions?
CM: These strategies will tend to lag plain-vanilla balanced funds with similar allocations during growth markets, but they will provide significantly more downside protection when markets are in a sell-off mode, like we saw in March 2020 and December 2018. Bottom line: BMO Retirement Portfolios are engineered to deliver protection against major drawdowns, while still giving investors the growth potential to fund their retirement years with a smoother, more consistent return profile than traditional balanced funds.
The strategies also use call and put options to maximize downside protection and maintain upside exposure. Can you explain how the options “collar” works?
CM: While investing in a broadly diversified equity portfolio, we simultaneously buy put options and sell call options – a strategy commonly known as a “collar” position. Put options increase in value as the underlying securities decrease, which creates an offset in the strategy when there’s a decline in the equity market. This acts as “portfolio insurance” given that it protects when adverse conditions arise. The drawback with this strategy is that it tends to be costly and can become a drag on returns. To de-fray that cost, we sell call options to generate cash flow within the portfolio. Selling call options has the effect of trading away some of the funds’ upside growth potential in exchange for cash flow – a trade-off many investors are willing to make to ensure protection against significant market sell-offs.
Low interest rates have made it challenging for Canadian retirees to earn enough investment income for their retirement. How do the Portfolios aim to deliver sufficient yield?
CM: The yield environment for retirees is incredibly challenging. On the one hand, they don’t want or can’t afford the volatility associated with equity markets. But, on the other hand, they need a return over and above the yield that fixed income investments currently provide. As a result, these investors need a specialized solution that seeks a comparatively higher return potential, while at the same time explicitly protecting against these risks. BMO Retirement Portfolios are just that solution, built specifically for clients who are drawing down their assets over time, as opposed to another product that was constructed for the wealth accumulation phase. At the same time, we offer flexible distribution options with the T4 and T6 Series, which allow investors to choose the amount of monthly income required for their needs.
Chris, one last question. We like to end by asking for book recommendations that have shaped the way you think. What would you suggest for our Advisor audience?
CM: Mine would have to be Thinking in Bets by Annie Duke. She’s a former World Series of Poker Champion, and has won over $4 million playing in tournaments. Currently, Annie is a consultant on decision strategy and, in her book, she discusses many concepts that can apply to investing and the decisions we make when building portfolios. The book stresses that when making decisions, there are always some factors we can’t control or predict. This is why more importance should be placed on the process you follow to arrive at your decision, rather than the outcome. Developing a strong decision-making system, and following that systematically, will likely lead to success in the long run.
Disclosures:
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in BMO Mutual Funds, please see the specific risks set out in the prospectus.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual Fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.
Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.