Why Retirement Portfolios Continue to Attract

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.