A client who has recently sold his property consultancy business in order to take an employed position wants to additionally fund for his retirement. He is nervous of the current stockmarket and states that he is looking for reduced volatility from his holdings. He does not know when he will start to drawdown the fund but he is 60 in seven years time. He wants to pay a fee to explore which pension product suits his needs and what asset classes and investments should he be looking at for his pension fund. How should he go about it?
First, the pension product. Instinctively, a SSAS or Sipp would match his needs as he has over £150,000 available for pension investment, wants a diverse investment portfolio constructed to suit him, needs to maximise tax relief as a higher-rate taxpayer, has future sizable Schedule E earnings and he wants the pension company to provide for him a clear charging structure which he understands. Due to the tightening of the occupational regimes for SSAS, it is agreed that a Sipp is the most suitable pension fund wrapper.
The investment portfolio to sit wrapped in the Sipp can be a broad range, including stocks and shares (including Aim-listed shares), investment trusts, unit trusts, Oeics, gilts and commercial property. The client has no interest in buying a commercial property but is attracted to property as an asset class. He also believes that the outlook for certain commercial property looks attractive.
Property forms one of the four main asset classes of investment alongside cash, bonds and equities. Due to need for the pension portfolio not to be exposed to high volatility, an investment term which is unknown, although the client could start to drawdown in seven years time and the client not concerned about liquidity (as he has other assets), capital preservation is the agreed investment objective.
There are various investment products that are a combination of the main asset classes which match a capital preservation objective, such as with-profits bonds, but the client preferred to invest in transparent funds.
Even though conventional investment theory states that a key to minimising risk is diversification, which in fact does not minimise risk but gives you the same level of risk as the broad market, the portfolio recommended contained 12 investments.
It was built on a styleneutral conservative growth model with direct holdings in non-cyclical consumer goods, cyclicals and financials with combined unit trust and Oeic investments giving an international spread.
Hedge funds were discussed as suitable for the portfolio to provide better riskadjusted returns by combing uncorrelated assets. After time, the client began to understand how hedge funds work. Most traditional funds will provide returns that are closely correlated with the movement of the stockmarket(s) invested in. The benefit of hedge funds is that the fund's value does not need to follow the movement of the assets invested in.
Often, hedge funds and there are more than 6,000 of them, have target investment returns and strict risk controls. Some financial experts believe that hedge funds are an asset class in their own right. A future review of the client's non-pension portfolio was agreed which would include hedge fund recommendations.
Due to the professional experience of the client and having listened to his wishes, an investment in indirect commercial property was recommended as a complementary core holding of the portfolio.
There are about 30 property unit trusts available to be recommended by UK IFAs. As only a handful are regulated, the funds are not allowed to be marketed directly to investors.
The client set the following criteria for the choice of property unit trust:
Avoid offices being held in the fund as rents have declined sharply, particularly in London, and the short-term forecast is not good.
The terms of the leases need to be long (10 years plus) with built-in uplifts. If commercial property has leases of five years or less, there may be risk for the property fund manger to dispose of these properties if they need to do so.
A good UK geographical spread.
The retail properties needed to have existing tenants as the earnings forecast is good.
Following the recommendation of a property unit trust matching the client's requirements, the portfolio was arranged with an agreement that it would be reviewed annually to ensure that the client had the flexibility, tax-efficiency and personalisation he sought from his pension investments.