How to plan for your retirement? Top fund manager shares key ingredients

In this edition of ‘Kopi-Gao: Outperforming Markets with Top Fund Managers’, we speak to Jin Yuejue from J.P. Morgan Asset Management.

Jin is the Asia Head of Investment Specialist within the Multi-Asset Solutions team based in Hong Kong. She is responsible for the development of new portfolios in the institutional channel and the marketing and communication of existing strategies in the intermediary channel.

Interview with Jin Yuejue, Asia Head of Investment Specialist at J.P. Morgan

Can you share more about yourself and J.P. Morgan Asset Management?

My team, Multi-Asset Solutions, is central to J.P. Morgan Asset Management business. We handle key investment decisions for our clients, focusing on two main aspects: top-down asset allocation and manager selection.

Our top-down approach involves determining the strategic asset allocation for the long term, as well as making short-term adjustments to capture immediate opportunities. The manager selection process involves choosing high conviction J.P. Morgan solutions to fit the overall objectives of our clients' mandates. We also analyse solution correlations aiming to optimize diversification benefits, and to help ensure that we are able to capture consistent and diversified alpha streams through the bottom-up security selection from our building blocks.

For decades, we've managed assets and advised asset allocation for retirement clients across the globe, including in the US, South America, Canada, Europe, and Asia. This extensive experience helps us understand clients' needs and design solutions to meet their retirement goals.

For decades, we've managed assets and advised asset allocation for retirement clients across the globe

How did you collaborate with DBS on the Retirement digiPortfolio?

A lot of consideration went into designing the Retirement digiPortfolio with DBS. In the US, we have extensive experience with retirement behaviour from the insights we’ve gained through the Chase Bank. Similarly, DBS has deep insights into the financial needs of Singaporeans. This intimate knowledge helped us make informed decisions and consider structural trends in creating this solution.

DBS sets the long-term goals for wealth accumulation and post-retirement features. We translate these goals into strategic asset allocations, or glide paths, based on each individual's age and time horizon. We work closely with DBS to ensure our guidance aligns with their objectives.

Strategically, we focus on long-term goals rather than shorter term trading to allow for compound growth. This collaboration with DBS helps us manage the portfolios effectively aiming to meet clients' long-term retirement goals.

We focus on long-term goals rather than shorter term trading to allow for compound growth. 

How do you determine the glide path for retirement portfolios?

When constructing the glide path, we categorise our inputs into three main areas.

First, we start with our partner's requirements. For example, DBS provides us with the ultimate goal for the glide path journey. Our partners at DBS, with their extensive experience in managing client assets, provide insights into their clients' risk tolerance and financial understanding, guiding us to set the parameters effectively. These goals are translated into quantitative parameters, such as long-term risk-return objectives and specific constraints on asset allocation percentages. This helps to ensure the retirement portfolio aligns with DBS's client expectations and success metrics. 

Our partners at DBS, with their extensive experience in managing client assets, provide insights into their clients' risk tolerance and financial understanding, guiding us to set the parameters effectively. 

Second, we incorporate J.P. Morgan Asset Management's intellectual capital, specifically our proprietary long-term assumptions and estimates. This annual research exercise involves experts from various asset classes, including equities, fixed income, and alternatives, who analyse long-term return expectations, volatility, and correlations across 200 asset classes. These inputs are crucial for designing a glide path that aims to meet the objectives and constraints provided by DBS.

The third component is unique to retirement portfolios: the evolving risk tolerance level of investors over time. Unlike static risk-based strategies, a glide path adjusts as investors approach retirement. Early in the journey, generally investors can tolerate higher risk due to their longer time horizon, which helps reduce the probability of negative outcomes. However, as they near retirement, their risk tolerance level decreases because they may have lesser time to recover from potential market downturns. This inverse relationship between time horizon and risk tolerance level is central to our glide path design.

Unlike static risk-based strategies, a glide path adjusts as investors approach retirement.

We consider these factors to ensure a balanced approach. Early in the glide path, the asset allocation remains growth-focused, taking advantage of compounding. As investors near retirement, the allocation becomes more conservative to preserve wealth. This results in a glide path that is not linear but adjusts more steeply in the later years.

Our process includes regular reviews and stress tests to ensure the glide path remains relevant and robust. We refresh our proprietary long-term assumptions and estimates annually and maintain an ongoing dialogue with our partners to adjust as necessary. Our embedded risk officers also conduct stress tests, simulating historical events like the 2008 financial crisis, to verify the glide path's resilience.

Early in the glide path, the asset allocation remains growth-focused, taking advantage of compounding. As investors near retirement, the allocation becomes more conservative to preserve wealth. 

In summary, our glide path design is a detailed, iterative process that balances growth and risk management, tailored to meet the long-term goals and evolving risk tolerance of retirement investors.

How do local circumstances like CPF factor into understanding the risk-return profile of an average investor here?

CPF, or Central Provident Fund, is the cornerstone of retirement planning in Singapore. In our approach, we categorise retirement assets into three buckets:

1. Stable:  This is also known as the “guaranteed floor”, which are the relatively safe or guaranteed funding sources that may cover the basic regular spending needs.  CPF falls into this category. 
2. Legacy:   In Asia, leaving a legacy for children is important. Investments here focus on long-term growth, aiming to build wealth over time.
3. Flexible:  This is where the Retirement digiPortfolio fits in. It aims to help retirees maintain their lifestyle post-retirement, allowing them to enjoy the fruits of their labour. It is flexible, in other words not mandatory but is something many hard-working Singaporeans may aspire to have. The returns are not guaranteed and there might be market fluctuations, but with a committed, long-term investment approach, retirees can expect to sustain their pre-retirement lifestyle, using these funds for discretionary spending like travel or dining out.

The Retirement digiPortfolio complements CPF by seeking to provide that extra source of flexible income while managing risk, helping retirees maintain their quality of life.

The Retirement digiPortfolio complements CPF by seeking to provide that extra source of flexible income while managing risk, helping retirees maintain their quality of life.

How did you choose the seven underlying building blocks used in the DBS Retirement digiPortfolio?

The selection process was a collaborative effort. DBS, with its extensive experience as a distributor, has a rigorous due diligence (DD) process. They have quality criteria such as inception year, size, performance, and peer comparison that every building block must meet.

From our side at J.P. Morgan Asset Management, we incorporate this into our investment process. Our Multi-Asset Solutions team has a dedicated Manager Research unit responsible for monitoring and researching all capabilities on the firm’s platform. This includes evaluating investment philosophy, processes, performance, and more. We have in-depth knowledge and timely updates on these building blocks, allowing us to make informed decisions.

For this portfolio, the goal is to provide core exposure without significant factor biases or style drift, as it is a long-term retirement glide path. We focus on selecting core building blocks representing each asset class, aiming to ensure they have a history of generally consistent alpha generation and a stable management team.

We have in-depth knowledge and timely updates on these building blocks, allowing us to make informed decisions.

The selection is continuously monitored to maintain our conviction in the portfolio. We review attribution, tracking errors, and aggregate styles to ensure the building blocks align with our objectives. Additionally, we aim to keep the portfolio simple and understandable for individual investors. Therefore, the building block line-up is relatively straightforward, helping to ensure clients can comprehend their investments.

This comprehensive approach seeks to ensure that the building blocks selected are not only high-performing but also aligned with the long-term goals of the Retirement DigiPortfolio.

Let's delve into the specifics of one of the underlying building blocks in the Retirement DigiPortfolio, such as the US Select Equity strategy. Can you share more about this flagship strategy?

The US Select Equity strategy is one of our flagship US equity strategies, managing nearly US$8 billion in assets as of 31 May 2024. It has a track record of about 40 years, having been established in 1984. The investment process and team behind this strategy has remained stable.

This strategy exemplifies our core investment philosophy. It doesn’t make large sector, factor, or style swings. Instead, it employs bottom-up selection based on company fundamentals and valuations across sectors. This approach allows the strategy to seek to achieve alpha at the aggregate level. The strategy's tracking error is moderate and within our comfort zone.

It doesn’t make large sector, factor, or style swings. Instead, it employs bottom-up selection based on company fundamentals and valuations across sectors. 

Performance-wise, the US Select Equity strategy has been relatively strong. Within the Morningstar US Equity Large Cap category, it ranks in the top quartile over three months, one year, and five years as of April 2024.  

Our emphasis is on long-term consistency rather than short-term outperformance. We look for strategies that stay true to their philosophy and deliver consistent performance. The last thing we want is a strategy that swings unpredictably between styles or sectors. We prefer reliable, steady strategies that allow us to manage overall risk and ensure they serve their intended purpose within the portfolio.

Our emphasis is on long-term consistency rather than short-term outperformance. We look for strategies that stay true to their philosophy and deliver consistent performance. 

Why not just use passive ETFs to construct the portfolio? 

Passive ETFs are indeed a valuable tool for multi-asset investors. In our overall retirement book, ETFs constitute a significant portion of our building blocks. The advantage of passive ETFs is their ability to provide precise beta exposure, whether it’s sector or market beta. 

However, the trade-off is that passive ETFs do not offer security selection alpha, which can be quite powerful. As multi-asset allocators, our goal is to deliver a diversified source of alpha. This includes not only allocation alpha but also manager selection alpha. Having both diversifies the return source and, over the long term, enhances the total outcome for clients.

The trade-off is that passive ETFs do not offer security selection alpha, which can be quite powerful.

In different market cycles, we aim for a balanced contribution from both sources of alpha. For clients open to all instruments, active strategies could play a crucial role in generating overall returns.  

What are the essential ingredients of successful retirement planning?

Successful retirement planning hinges on two key principles: starting early and staying committed. Even the best-designed glide path and asset allocation won't help if these principles aren't followed. If someone is close to retirement with insufficient savings, they may need to adjust their retirement plans, such as working longer or modifying their post-retirement lifestyle. Digital tools can help by adjusting wealth accumulation assumptions and retirement timelines accordingly.

Successful retirement planning hinges on two key principles: starting early and staying committed. 

Another point is that some retirees completely divest their investments upon retirement. We encourage retirees to maintain some assets in investments to mitigate the inflation impact and sustain their purchasing power. With people living longer, it's crucial to have an active investment strategy even post-retirement to ensure financial security throughout their extended lifespan.

We encourage retirees to maintain some assets in investments to mitigate the inflation impact and sustain their purchasing power. 

From a Singaporean perspective, CPF provides a solid foundation. CPF Life and other schemes ensure a basic retirement sum and a guaranteed 4% return, acting as a safety net. This is a significant advantage for Singaporeans.

Our collaboration with DBS on the Retirement digiPortfolio aims to diversify retirement planning options. Typically, people associate retirement with insurance, but there isn't always a clear wealth management solution dedicated to retirement. Our objective is to offer a private complement, providing more choices for investors as they plan for their future. This solution is about giving our clients the tools they need to ensure a secure and comfortable retirement.

This solution is about giving our clients the tools they need to ensure a secure and comfortable retirement.

About kopi-Gao: Generating Alpha with Top Fund Managers

Kopi-Gao is regular column by Beansprout that features conversations with professional fund managers, offering a rare glimpse into the strategic thinking and personal philosophies that drive the world of investment. These interviews are aimed at providing insights and actionable knowledge for individuals looking to understand the art and science of successful fund management in today's ever-evolving financial landscape.

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