From April, when the pension freedoms will finally be here, asset managers will compete for a share of the estimated £12bn a year that had previously gone into the annuity market.
Many asset managers have been launching new funds or repositioning existing products to cater for the increased demand for income anticipated in the new era. Multi-asset funds have been particularly prominent as solutions for people who want to take advantage of the new pension freedoms.
Asset managers including Threadneedle, Schroders, Legal & General and Newton have launched multi-asset vehicles aimed at the new retirement savings market. So what can the multi-asset approach offer people who were likely to have annuitised before the pension reforms?
Craig Nowree, client portfolio manager at Threadneedle’s multi-asset team, points out that people who do not annuitise will need to take on some element of risk to generate enough income for retirement. But they will still want a secure pot of money to pay the bills or for the proverbial rainy day when the boiler breaks. They may even
want to preserve some of their retirement savings to pass on to
their families following changes to the 55 per cent “death tax” on pensions that will also take effect from April.
“Multi-asset is the best way of controlling volatility, thereby minimising the downside,” says Nowree. “In a multi-asset strategy, you are investing in a range of different asset classes that are not all correlated. Some go up and some go down at different times so the overall volatility is reduced.”
Schroders, which launched a global multi-asset fund for UK investors in December, has also found evidence of an appetite for low volatility and capital preservation among investors.
The fund mirrors an existing offshore strategy – the Schroder ISF Global Multi-Asset Income fund.Head of UK intermediary at the group Robin Stoakley says: “It is a global portfolio that builds in a 7 per cent total return, of which 5 per cent is income. It has 6 to 7 per cent volatility, which is half – or slightly less than half – the volatility of equity products.
“It seems an obvious product, not just post-retirement but also for people on their way to retirement. Advisers in the UK are fund-focused and fully understand that income from equities alone can be successful long term but the structure can be volatile.”
The outsourcing question
Chelsea Financial Services managing director Darius McDermott believes it makes sense for people who cannot afford advice to invest in a multi-asset fund, as they will have someone building a diverse portfolio for them to provide retirement income.
“IFAs are also going to make use of multi-asset funds. The regulatory burden makes it difficult to do due diligence on funds themselves, so many are outsourcing to multi-asset or multi-manager funds, or a combination of both,” he says.
Advice firm LEBC Group prefers to build its own multi-asset portfolios for clients. Head of individual savings and investments Kay Ingram says it found that taking a multi-manager multi-asset approach was too expensive. It reduced costs by taking the process in-house.
“We are waging a war on fund managers who are charging too much,” says Ingram.
McDermott concedes that multi-manager multi-asset funds will be more expensive than single manager multi-asset funds. However, he highlights two he says are not very expensive and are suitable for the new pensions environment: Premier Multi-Asset Income & Growth and F&C Multi-Manager Navigator Distribution.
“The Premier fund has a low yield of 2.5 per cent but the group does have other funds for people who want a higher income now,” says McDermott. “There are lots of people who want a modest income and who want to keep some growth. People are living longer and the worry is they may take too much income too soon, with not enough growth in their portfolio, so their pension pot will shrink at a greater rate.”
McDermott adds that the F&C fund, managed by experienced multi-managers Rob Burdett and Gary Potter, has a 4.5 per cent annual yield.
“The fund selection is extremely good and covers a range of investments. It invests in things like infrastructure investment trusts which most people would not be able to locate,” he says.
McDermott also highlights JP Morgan Multi-Asset Income, Henderson Cautious Managed and Investec Cautious Managed as other top picks for retirement income.
Simplicity, not complexity
Tilney Bestinvest managing director, business development and communications, Jason Hollands believes “off the peg” solutions such as multi-asset funds are useful for advisers who do not have discretionary permissions. “But it’s important to understand what you are using with the client,” he says.
Hollands points out that some funds may use derivatives and exchange traded funds to drive asset allocation without taking a risk on stock selection.
“Derivatives are used to replicate the return on an index at a low cost – they are used to keep cost of execution down and to manage downside risk,” he says. He does not see the use of derivatives as a concern, as long as they are used to manage risk rather than generate returns.
The Threadneedle Global Multi-Asset Income fund, managed by Toby Nangle, has a relatively straightforward structure, says Nowree.
“What we are after is active asset allocation and active management of the underlying assets,” he says. “We spent a great deal of time on the structure. We looked at derivatives, having call options to provide an income, but in the end we came back to something simple.”
Stoakley has a similar story. “If you want success in offering a product it has to have straight-forward, understandable income, diversity and a proven structure. We think we can tick all the boxes. We have some money in already but expect to see longer-term growth,” he says.
Size dictates solution
Thomas Miller Investment head of private investment management UK Andrew Herberts says the size of someone’s pension pot largely dictates which solution will be suitable.
“If you have a large pension pot you can take more risk; you can be more volatile with income and grow your capital. But once you start getting more capital constrained, we’re seeing the need to consider a core income solution.
“Very often financial planners are still looking at annuities to deliver the core level of predictable income. You can offload longevity risk onto someone else with annuities and then there are those assets that can be managed in the market to deliver an income and, as much as you can, a level of capital growth to maintain future income. That’s where multi-asset solutions come in.”
Herberts says multi-asset funds can be used alongside annuities to enhance living standards in retirement.
“Once you buy an annuity the best you can do is maintain your standard of living through an inflation-linked annuity. But if you have that as the core, multi-asset portfolios give you the chance to see income growth potential ahead of inflation and improve your standard of living,” he says.