According to a press release, the white paper, “On the Optimal Design of Target Maturity Portfolios,” authored by Janis Zvingelis, Ph.D., asserts that the main risk facing long-term investors is not the short-term variation in asset returns but rather longevity risk, especially in light of increasing life expectancies. “We believe that most target maturity offerings currently on the market are under-serving their investors by failing to address longevity risk,” says Michael Annin, CFA, managing director of Mesirow Financial Investment Strategies. “The fact is that most investors will outlive their retirement savings given the current savings rates and the design of current target maturity products.
The firm contends that the usual approach to constructing an equity “glide-path” – the asset allocation backbone of the portfolio – “can be somewhat arbitrary and rarely addresses the longevity risk issue.” In contrast, Mesirow Financial says the methodology underlying its new offering “â€¦has a solid basis driven by the concept of time-varying inputs (expected returns, standard deviations, and correlations).” Time-varying risk of equity, one of the main drivers of the simulation results, is a consequence of “time diversification”, according to the firm – a phenomenon whereby the risk of investing in equity decreases dramatically with the investment horizon, while the risk of cash increases considerably with the investment horizon.
“The use of time-varying inputs results in a generous allocation to equity in the portfolios that drive the performance results,” according to the firm. Moreover, in contrast with the arguments put forth in support of a different approach, Mesirow claims that “the implied standard deviations and the simulation results demonstrate that for long horizon investors the increased equity allocations do not lead to excessive portfolio risk.”
The study also showed that even slight changes in investors’ saving and income withdrawal
behavior can have dramatic impact on their cumulative wealth outcomes.
Mesirow Financial is a diversified financial services firm headquartered in Chicago, and founded in 1937. More information about the firm is available at http://www.mesirowfinancial.com
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