Art by Jackie Ferrentino
Adding a range of high-income-generating investments could
significantly boost income returns for retirement-stage target-date funds
(TDFs), a study suggests.
The research from Wilshire Funds Management, sponsored by
the National Association of Real Estate Investment Trusts (NAREIT) was based on
portfolio optimizations using 40 years of investment return data through 2015.
It found that adding a range of high-income-generating assets to a traditional
retirement-stage TDF portfolio could boost income returns by nearly 40%, while
providing comparable total returns and no increase in risk.
Wilshire’s research is based on a variation of the
mean-variance optimization (MVO) method for portfolio modelling. While
traditional MVO models are designed to determine optimum levels of various
portfolio assets that will produce a maximum total return for a specified level
of risk, Wilshire’s income-oriented mean-variance optimization (IOMVO) model
also incorporates a requirement for a specified level of income return.
Wilshire found that a traditional MVO-modeled portfolio that
delivered a 2.37% annual income return and a 5.37% annual total return with an
8% level of portfolio risk could be enhanced with IOMVO modelling to deliver a
greater annual income return of 3.25% and a comparable 5.27% annual total return with the same 8%
level of risk.
Comparing the asset allocations between the traditional and
• Equity allocations were reduced from 35% of the MVO
portfolio to between 3% and 15% of the IOMVO portfolio;
• High-yield bonds and preferred stocks became key parts of
the IOMVO portfolio. The allocation to these assets increased from 9% to
between 22.7% and 25%;
• Non-U.S. developed market stock allocations rose from 4%
of the MVO portfolio to between 9% and 23.5% of the IOMVO portfolio; and
• REIT allocations rose from zero in the MVO portfolio to
approximately 8% of the IOMVO portfolio.
“Depending on the income needs of the investor, portfolios
that generate less income may require retirees to dig deeper and more
frequently into their savings to fund their expenses, potentially resulting in
the depletion of their assets while they are still living,” says Wilshire Funds
Management Chief Investment Officer (CIO) Joshua Emanuel.
“Income-oriented portfolios with significant allocations to
assets such as REITs, high-yield bonds, preferred stocks and non-U.S. developed
stocks may help investors meet the challenge of producing retirement income
with less reliance on their savings,” he says.