Better Than Zero

Risk averse retirees could face the sobering prospect of running out of money before they die given the current low returns on conservative assets.

The present ‘close to zero’ returns on cash in the US and UK means many retirees who are now consuming their nest eggs with limited capital growth on their remaining assets will depreciate their savings at a much faster rate.

There is a chance that many retirees would run out of money anyway based on ongoing adequacy issues and increasing life expectancies, however what we could see as a result is a return to risk; the notion of investors looking anywhere they can for yield.

burningpants was in the US last week to see how the global downturn is affecting the industry and consumer attitudes.

In two presentations – one made by Laurence Fink, the global chairman and CEO of BlackRock, a global behemoth asset manager, and another by James Gorman, the Co-president of Morgan Stanley – it became apparent that the industry in the US believes it has dodged a bullet.

Yet at the same time it seems reluctant to accept all of the blame for the crisis (more on this further down the article).

On the subject of investor returns, there was a comment by both Fink and Gorman that investors would be driven to look beyond cash as a place to invest.

Fink told delegates at a Money Management Institute gathering that “people will need to earn more than zero” to avoid running out of funds.

Interestingly most money market funds are only paying around 1% with the US Government cost of funds at close to zero.

1% is minimal, yet not too bleak if one considers that headline inflation in the US has been tracking backwards every month between March and September in 2009.

In March the US entered a deflationary cycle with a drop of -0.40. This was followed by April -0.70, May (-1.30), June (-1.40), July (-2.10), August (-1.50) and September (-1.30).

The recent return of the bulls and a turnaround in equities returns has coaxed some investors out into the open, yet the level of volatility is still scary for many investors and the correction over the past week is reminding people of the inherent risks of investing.

Another option is Government bonds, which are currently paying around 3.5%.

As for the crisis and the role played by the industry Fink postured that the crisis was “a society issue” and that “we were all to blame”.

Gorman, meanwhile, said that there were three core reasons for the crisis – these were lending, liquidity and leverage.

Too much leverage (gearing by institutions), excessive lending (and poor quality) and the freezing up of the capital markets – all combined to almost cripple the industry.