The search for retirement income sources in a low-yield environment has highlighted a trio of possibilities — some counterintuitive.
Enter municipal bonds, reverse mortgages and managed futures.
All three have had their share of obstacles in gaining favor with investors. Municipalities, for one, have fallen on hard times and face financial strains from unfunded pension deficits. Meanwhile, reverse mortgages have come under criticism for being costly and hard for seniors to understand. Finally, managed futures have been demonized as a complex hedge fund strategy suitable only for the most sophisticated institutional investors.
But financial advisers can help affluent retail clients with these strategies, too — provided they do their due diligence.
“The one thing that history has taught is that diversification wins. It's not that hedge funds always win or that you can't invest with them — that's irresponsible thinking by advisers,” said Ranjan Bhaduri, chief research officer at AlphaMetrix Altenrative Asset Advisors and a panelist at the conference.
Though municipal bonds historically have been thought of as mattress money, panelist Ronald Bernardi, president of
Bernardi Securities Inc., noted that the danger in investing in munis is very real.
“There have been bankruptcies both threatened and real,” he said. “If clients can't get comfortable with potentially losing money, then they shouldn't invest in this. These days, the firm is placing a special emphasis on research since municipal bond insurance has largely deteriorated.
When it comes to managing a portfolio of muni bonds in a separate account, Mr. Bernardi recommends laddering individual issues over an intermediate time period, which can reduce interest-rate risk and can give advisers more control over what they select.
With muni bond funds, on the other hand, investors have no say on the purchasing decisions of the fund manager or the credit quality of the issues.
Reverse mortgages are making a comeback for clients who are retired, noted John Salter, vice president at Evensky & Katz Wealth Management. Only a year ago, he considered the reverse mortgage an option of last resort for a client. Now he believes it can be a tool for retirees during down markets.
“The general idea is whether we can borrow from a reverse-mortgage line of credit when the portfolio is off in order to not sell in a bear market,” Mr. Salter said.
Home equity lines of credit lack the flexibility of reverse mortgages. The latter don't require repayment, for instance.
In practice, Mr. Salter uses a two-bucket strategy: the investment portfolio and the cash flow reserve account, which holds two years of living expenses. During re-balancing or when making investment changes, the investment portfolio can feed the reserve account.
FILLING UP THE BUCKETS
During a down market, the strategy expands to three buckets, with the reverse mortgage acting as the third bucket. A client can borrow from that reverse mortgage in a pinch, avoiding the sale of assets in a down market, and repay the loan when the markets come back, Mr. Salter explained.
Finally, managed futures have their benefits as a strong diversifier when stock markets are volatile, bearing a low correlation to traditional asset classes. Typical mass- affluent investors, however, have very limited access to these investments, with the exception of those who are participants in pension plans that use these strategies and some mutual funds that focus on managed futures, said Mr. Bhaduri.
“It's a situation where the regulators need to get educated,” he said.
dmercado@investmentnews.com
