When Chancellor George Osborne unveiled the biggest overhaul to the pension industry in almost a century, the asset management industry was immediately singled out as a beneficiary of the changes.
The Budget opened up the option for retirees to cash in the money built up in their defined contribution pension, subject to their marginal rate of tax, and use it for other purposes, such as investing in funds.
One fund manager welcoming the proposed changes is Old Mutual Global Investors head of multi-manager John Ventre, who oversees the Generation range. He says: “The great thing about the Budget was it continued the process of freeing up retirement investments to create better outcomes. The very nature of annuities means the underlying capital has to be invested in risk-free assets. If someone is providing you with a cast-iron guarantee, then the assets backing that up have to be risk-free. Of course the problem is risk-free assets don’t yield very much, if anything.”
OMGI launched the Generation range in November 2012 as a whole-portfolio retirement solution.
The range is a four-strong suite of risk-rated funds aiming for a total return in excess of inflation including an income yield of 4 per cent or 6 per cent.
On trying to overcome the weaknesses of annuities, Ventre says: “The logical solution is to drop the guarantee and try to provide the same kind of outcomes over the medium to long-term – providing a regular income and managing longevity risk – while managing inflation risk.”
Managing funds as a retirement solution demands a different approach to that taken on Ventre’s Old Mutual Spectrum and Voyager ranges. The Generation range has been designed from the bottom up with the aim of meeting retirees’ needs.
Income generation is a key element, with income-yielding assets accounting for about two-thirds of the portfolio. Ventre says: “If clients are going to live off their assets, it is much better to live off them with income rather than by selling assets to meet month-by-month needs.”
When it comes to equity income, the range has positions in offerings such as Montanaro European Equity Income, OSAM Global Equity Income and JPM US Equity Income for global exposure and Liontrust Macro Equity Income for the UK.
Ventre is cautious on developed market equity valuations, with most of the high exposure being to the UK with some to the US and Europe. He has been favouring cheap global names and Asia through holdings such as Metisq Asian Equity.
Given that one-third of the range’s equity exposure does not generate income, Ventre makes use of call option overlays to enhance the income on its equities. The allocation to these overlays is actively managed to reflect market conditions.
“What we effectively do with this is harvest income from our equity allocation, by giving upside in exchange for a regular premium to enhance the income. If we did not do that, the funds would have to be more skewed to income and less diversified. This would be at the expense of good multi-asset management.”
Fixed income is an “interesting” area for the range at the moment, with exposure to bonds ranging from 17.1 per cent in Old Mutual Generation Target 4:6 to 39 per cent in Old Mutual Generation Target 3:4.
A position has been initiated in the Alfred Berg Hoyrente fund, which invests in Nordic high yield bonds with a typical yield of between 9 and 10 per cent. “These are great investments at the moment because they are basically floating rate so have no interest rate risk.”
Local currency emerging market debt is another attractive area. The Generation funds have a position in Stone Harbor Local Currency Emerging Market Debt, reflecting the view that the tightening of US monetary policy will not have as big an impact on the asset class as feared.
“The risk the market does not like is as US interest rates rise, money might fly back to the dollar like it did in the 1990s.
“The difference this time is rates will not go up by 7 or 8 per cent, they will go up by a couple of hundred basis points over three years. Why would you leave a currency yielding 11 per cent to go back to a dollar yielding 2 per cent?”
However, given that the Generation range is designed to protect retirees’ capital against inflation and offer an element of growth, Ventre is careful not to take a big style bet by focusing purely on income through stocks and bonds.
The four funds have exposure to other yielding assets such as commercial property and infrastructure through holdings such as CBRE Property, M&G Property and TG Rare Infrastructure.
When combined with commodities holdings such as Goldman Sachs Strategic Commodities and Threadneedle Enhanced Comodities, these “real return” assets give the funds a degree of inflation protection.
“Inflation is a much bigger risk when a person is retired because they do not have an earned income – which tends to be correlated with inflation. So we want more inflation-sensitive, real assets in the portfolio. Commercial property, infrastructure and commodities fit that bill.”
About Old Mutual Global Investors’ Generation range
OMGI’s Generation range launched in November 2012 and is managed by head of multi-manager John Ventre. Its four funds aim for an annual return of 3 or 4 per cent above the UK’s inflation rate over five or seven-year rolling periods, with a regular income of 4 or 6 per cent a year.