Sequencing Risk: The Hidden Retirement Threat

How Absolute Return Equity Income Funds Can Defend Against It 

Introduction: Retirement's Hidden Risk

As investors transition into retirement, one of the most dangerous and frequently overlooked threats is sequencing risk. 

Even with strong average returns, theorderin which returns occur can permanently impair outcomes. This risk isn't abstract. It's structural, behavioural, and time-sensitive - and it cannot be diversified away through traditional means. 

The solution? Equity portfolios explicitly designed to deliver income and withstand early-period drawdowns, especially through dynamic, risk-managed strategies like Absolute Return Equity Income Funds. 

Quantifying the Risk: Same Returns, Different Outcomes

Consider two identical portfolios, each with average annual returns of 6.0% and starting balances of $1 million, from which $60,000 is withdrawn annually. 

Although both earn a 6% average return over a decade, Investor 1 experiences negative returns in the first two years, while Investor 2 encounters them at the end. The results are stark: Investor A finishes with approximately $539,000, while Investor B ends with nearly $899,000. Same average return, vastly different outcomes over $ 360,000. 

This difference isn't theoretical. It's structural. And it strikes precisely when retirees are most vulnerable: the beginning of their drawdown phase, when recovery time is limited and emotional responses are heightened. 

Source: Gyrostat analysis case study 

The table illustrates the dramatic differences in account balances during the 10-year retirement study period. 

For retirees, the accumulation-phase approach of dollar-cost averaging is no longer available. This absence of ongoing contributions amplifies the impact of early losses and heightens the risk of permanent capital depletion. 

The Psychology Behind Inaction

Why do so few retirees take proactive steps to protect against sequencing risk? 

Many insure their homes, cars, and health, yet fail to insure their retirement capital. This often stems from behavioural biases, particularlydomain ignorance- a misclassification of investment portfolios as mere return generators rather than the primary enabler of retirement lifestyle. 

Unprotected, portfolios remain exposed to degradation and the real possibility of lifestyle disruption. 

Traditional Defences: Helpful But Incomplete

Most advisers recommend holding two to three years of cash reserves to avoid selling assets in a downturn. While this can reduce withdrawal risk, it also depresses long-term returns and fails to address drawdowns in the equity portion of the portfolio. 

To go further, advisers must improve the design of the equity sleeve. 

Volatility is not merely random noise, it clusters. Crashes are not anomalies; they are structural features of markets. Risk does not unfold smoothly; it gaps. Despite decades of quantitative refinement, many models continue to assume bell-shaped distributions in which five-sigma events are "impossible." Yet they occur repeatedly.

"Markets are far more violent than the Gaussian model assumes. Crashes are not outliers - they are part of the system." 

Benoit Mandelbrot,The (Mis)Behavior of Markets 

"The illusion that we understand the past fosters overconfidence in our ability to predict the future." 

Daniel Kahneman,Thinking, Fast and Slow 

Absolute Return Income Equity: Designed for Uncertainty

Absolute Return Income Equity Funds, such as those offered by Gyrostat, are designed around uncertainty itself. Protection is integrated from inception, tail risk is recognised as a constant, and the strategies dynamically adapt as conditions evolve. 

At Gyrostat, we don't ignore theory - we design beyond it. 

This is not market timing. It is systematic, rules-based protection that adjusts continuously with market reality. 

Results That Support Resilience

Since 2010, Gyrostat's Class A Absolute Return Equity Income Strategy has delivered: 

1. Lower Risk:14 consecutive years without a single quarterly drawdown exceeding 3% 
2. Positive Returns During Major Market Falls:Consistent gains when markets declined sharply 
3. Non-Correlated Returns:Performance largely independent of market direction 

Performance Summary (to 30 June 2025) 

These returns have been delivered consistently across market regimes, smoothing the ride for retirees and providing a tangible shield against sequencing risk. 

Conclusion: Peace of Mind Over Pure Growth

Sequencing risk is not merely an academic construct. It is a real threat to both financial security and emotional wellbeing in retirement. Dynamic hedging within an absolute return framework provides a credible solution, reducing the likelihood of forced drawdowns, dampening volatility, and enabling investors to stay invested with confidence. 

At retirement, it's no longer only about the magnitude of returns. 

It is about the order in which those returns arrive, and what that sequence means for the sustainability of the lifestyle. 

Gyrostat Capital Management prepared this document and it is intended only for Australian residents who are wholesale clients (as defined in the Corporations Act 2001). To the extent any part may be perceived as financial product advice, it is general advice only and has been prepared without taking into account of the reader's investment objectives, financial situation or needs. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should consider the Product Disclosure Statement (PDS) relevant to the Fund before making any decision to acquire, continue to hold or dispose of units in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund. One Managed Investment Funds Limited ACN 117 400 987 AFSL 297042, is the responsible entity of the Fund but did not prepare the information contained in this document. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information in this document cannot be warranted or guaranteed.