Off the beaten track: The alternative new homes for pension cash

While the onset of the pension freedoms has knocked the annuity market sideways, one area the revamp has given a fresh shot in the arm to is multi-asset income investing.

Since the Chancellor announced in his 2014 Budget that investors would, 12 months down the line, be able to do as they see fit with their nest eggs, fund providers have been rolling out “one-stop-shop” income funds in a bid to attract the to-and-through retirement market.

Invariably they all have some common traits, such as targeting a sustainable level of income (typically 3 per cent and above) and capital growth over the longer term.

Data from Square Mile Research highlights the ongoing charges associated with this new breed are usually in the region of 1 per cent: a fee that differentiates them from the traditional multi-manager distribution funds, which usually have an OCF nearer the 1.5 per cent mark.

Square Mile’s head of risk based solutions research Alex Farlow points out funds will invest globally as opposed to more traditional products in the IA Mixed Investment sectors, which have tended to have more of a UK bias.

“Their remit is fairly unconstrained too and can span global equities, government bonds, emerging market debt, high yield bonds, investment grade bonds, global Reits, convertible bonds, infrastructure and structured credit,” he says.

Investing off the beaten track

One of the most recent additions to this area has been the Rathbone Multi-Asset Strategic Income Portfolio, which launched at the start of October. Fund manager David Coombs says he is “not targeting a high yield but a sustainable real yield, which can hold itself throughout the life of the investment”.

Part of his strategy is including some cash in alternative investments. He says: “I have money in Carador Income, which invests in collateral loan obligations. It yields around 13 per cent. I also invest in SQN Asset Finance Income: an asset-leasing fund that leases industrial machinery on a three- to five-year basis, which has a historical yield of 6.9 per cent.”

Old Mutual Global Investors launched “refreshed versions” of its multi-asset Generation portfolios on the back of the retirement market overhaul. These funds, co-managed by Anthony Gillham and Paul Craig, have also looked off the beaten track in a bid to find decent sources of income generation. For example, the team has invested in Sequoia Economic Infrastructure Income, which focuses on debt exposures to economic infrastructure projects and targets a dividend of 6 per cent.

Craig says: “We really look at everything that is available to us. The closed-end space has come to the fore. Fixed income is the natural hunting ground for yield but, given its expense, we are looking to supplement that through other areas.”

Multi-manager specialist Architas threw its own hat into the ring back in March with the launch of its Diversified Global Income fund. Manager Caspar Rock has allocated a chunky 20 per cent of the fund to alternative assets.

He says: “We currently have investments in infrastructure, renewable energy, specialist property, real estate finance and aircraft leasing, for which we use the Doric Nimrod Air Two fund [the specialist Guernsey-domiciled vehicle buys super jumbo jets and leases them to Emirates Airline].

“These specialist assets tend to be less correlated to equities and bonds, while generating attractive levels of income to supplement the equity dividends and bond coupons we earn from the more traditional allocations making up the remainder of the portfolio.”

There is a clear trend of fund managers having to mine deeper into the market in a bid to find new sources of income. As Hargreaves Lansdown senior analyst Laith Khalaf points out, the current stretch for yield means multi-asset managers are having to “go foraging in new fields”.

But are alternative income sources really a safe place to be putting retirement savings? According to Axa Wealth head of investing Adrian Lowcock, as long as simple rules are followed such assets do not have to increase risk.

“First, do not just use alternatives for income. Adding about 20 per cent to a portfolio provides diversification and actually reduces risk. Second, remember that the quality of the assets and therefore the income it produces matters most. Confidence in the multi-manager’s or alternatives specialist’s research is crucial,” he says.

“Alternative income assets cover a broad range of products, from catastrophe insurance to timber and student property. As each has its own risks and opportunity, it is important to understand how these risks behave and how closely they correlate with each other. Doing so means a portfolio can be built which complements traditional equity and bond investments.”

Khalaf agrees. He says: “Picking up yield here and there can be a valuable skill to offer investors as long as managers are not going too far out of their comfort zone and dabbling with obscure instruments with inscrutable risks.”

Vying for attention

As a result of the spate of new launches, there are a lot of multi-asset income funds now vying for attention. But it is early days for their target market and the jury is still out on whether they really are the panacea investors are looking for.

Take-up to date has been relat-ively muted. Schroders’ Global Multi-Asset Income portfolio, which launched in December 2014, has £20.4m in assets under management, Newton’s Multi Asset Income fund, which was rolled out in February, has £15.2m, while the Architas fund has just £3m. Of course, as Khalaf asserts,  most new fund launches “take time to reach critical mass, and some never do”.

Whitechurch Securities managing director Gavin Haynes says his firm has not been backing any of the recent “plain vanilla” launches.

“Where we are interested is in looking at funds that take more of an absolute return approach to multi-asset income investing, such as Natxis H2O Multi-Asset Returns and Aviva Multi-Asset Income,” he says.

Chelsea Financial Services managing director Darius McDermott is also backing more established funds, citing in particular the £421.1m Premier Multi Asset Monthly Income fund, which launched in 2009.

McDermott says: “Manager David Hambidge and his team have a demonstrable capability for producing excellent results and this fund delivers a high income today. At around 4.5 per cent, this is an excellent income in a well-diversified portfolio.”

Either way, despite the one-stop-shop nature of these funds, advisers feel investors would be wise not to rely just on a single vehicle when it comes to their retirement savings.

Haynes says: “These funds have a part to play in a portfolio; however, as investors accumulate wealth they are largely going to want a further level of diversification than having all their cash in one fund.”

Khalaf agrees: “Investors should always look to diversify across more than one fund, whichever sector they invest in, and that applies to multi-asset income funds as well as any other. You do not want too many eggs in the custody of just one manager, even if they are a proven talent.”