We are on the cusp of a technological revolution and, at the same time, our working population is halving. Such dramatic changes will have an impact on Kiwis’ retirement incomes, but you can prepare.
The world is changing rapidly and if you assume that investing for retirement will be more of the same, think again, says Harbour Asset Management’s Susanna Lee.
Multiple forces are at work in our economy. One that investors should have their eye on is the potential for dramatic demographic change as the baby boomers age and retire. In New Zealand, the number of dependants per 100 workers is 50. This is expected to balloon out to 77 in the next 50 years.
“The working population is going to halve and you’ll have one-quarter of the population supporting three-quarters,” says Lee. Investment growth is, of course, more complicated than just a single factor in isolation, says Lee. Capital and technology will also have an impact.
“Although demographic changes are likely to depress growth, we’re on the cusp of a technological revolution, with more patents being filed around the world than ever before,” says Lee. “Automating jobs through technology is how we will grow ourselves out of this demographic hole that we are facing.”
That doesn’t mean Kiwis have to invent the technology. Instead, we need to evolve and adopt it to keep productivity high as workforce numbers fall.
“For example, we could expect to see productivity increase as transport companies adopt self-driving cars in the next five to 10 years, supermarkets introduce more self-checkouts, and fast food outlets offer more self-ordering,” says Lee.
Such dramatic changes to industry will have a huge effect on Kiwis’ retirement income if they stick with traditional passive index-tracking funds that buy a bit of everything.
“If you invest in a passive index fund, you always get what the market has, even if some sectors are challenged,” says Lee. Passive funds may have investments in companies with technologies or in markets that have uncertain futures. “When it comes to utility companies, for example, we don’t know what our power grid is going to look like in 10 to 15 years or even that these companies are going to be that profitable,” says Lee. Yet passive funds buy their shares and longdated bonds.
An active manager can construct portfolios to succeed in different markets, moving in and out of companies and sectors as their fortunes wax and wane.
That’s because active managers don’t wear the same straitjacket as a passive fund's. Harbour can weight its funds towards growth sectors such as healthcare, age-care and other industries that benefit from demographic and technological developments. Harbour’s managers also monitor local companies to see which are using technology to the best advantage.
“We talk to companies about the technologies they are adopting,” says Lee. The shift in demographics may also affect fixed-interest investments as the Reserve Bank of New Zealand manages interest rates to navigate the influence of supply and demand on inflation, which is likely to be influenced by the ageing demographic, says Lee.
Although demographic change and technological evolution will be big players in growth in the decades to come, there will be times when labour-market changes drive growth and others when technology plays catch-up or gets ahead, says Lee. As one is in the ascendancy, the managers will be weighing up which investments have the best prospects at that time.
This means Kiwis need to look for funds and portfolios holding hand-picked investments with good long-term prospects as New Zealand moves through different market cycles.