BlackRock Inc.'s Quintin Price has advised his 80-year-old mother-in-law to hold more stocks as rising life expectancy pushes the elderly to seek higher investment returns.
"The conventional advice, when life expectancy was lower in the past, was to move more investments into fixed income," Price, who is responsible for active equities and fixed income as BlackRock's head of alpha strategies, said in an interview yesterday at the firm's offices in Zurich.
"This conventional wisdom was born during a time when life expectancy was much lower and is simply no longer valid," he said. "People are going to have to find a new way of investing to make their savings pot last longer after retirement -- that's not going to come from high-quality bonds yielding almost nothing."
The yield on German two-year government bonds fell below zero in early July as the euro-area debt crisis spurs demand for the safest assets, meaning investors are paying to lend money to Europe's biggest economy. The Stoxx Europe 600 Index of the region's equities, which has rallied 13 percent from this year's low on June 4, may climb another 15 percent by the end of 2012, according to Price.
"High-quality bonds are expensively valued because there has been an enormous amount of risk aversion," Price said. "Yields on those instruments that people who were retiring or were already retired typically owned have fallen dramatically at a time when they're living longer."
The proportion of people older than 65 in Europe will rise to 19 percent in 2020 from 16.6 percent this year, according to projections from the U.S. Census Bureau. Only Japan's ratio is higher, at 23.9 percent for 2012. Life expectancy increased from a global average of 48 years in 1950 to almost 70 years in 2010, according to the International Monetary Fund.
The Stoxx 600 has advanced 8.5 percent this year as euro- area policy makers eased repayment terms for Spanish banks and European Central Bank President Mario Draghi pledged to preserve the euro. Price said the measure could climb further as many investors hold fewer European shares than are represented in global benchmarks.
"There's definitely a plausible upside scenario," he said. "Since Draghi's comments, we've seen our clients adding to their positions in European equities, absolutely unambiguously. We've had hundreds of millions of dollars of flows since then. Nobody is naive about the fact that this is still an extraordinarily delicate game, but I think his comments removed the disaster scenario."
Price said the threat of inflation amid continued accommodative monetary policy further boosts the case for retiring investors to increase weightings in high-dividend equities to make their savings last longer. Investors must look to a longer time frame and try to shrug off worries about short- term stock moves, he said.
"We're going to see this kind of investment evolve to the point where people are going to change behavior and going to take longer-term views and going to own more high-yielding equities," Price said. "A shift to this new investment strategy will give investors a better inflation-hedged income."