Asset managers are divided over how best to tackle the impending flood of demand for income solutions from retirees taking advantage of new pensions freedoms.
But advisers remain sceptical about new solutions and the ability of asset manager products to deliver the income and growth that investors need.
With retirees being given the power to take control of their pension pots in April, asset managers have been scrambling to launch multi-asset income funds, meant to effectively replace the sort of returns pensioners would have received from annuities.
But with surveys revealing that many investors are confused as to where to go for retirement income, investment giants such as BlackRock and M&G are taking very different approaches to generating income with their pension reform products.
BlackRock has launched a Global Multi-Asset Income fund and is looking to convert its British Assets trust to a similar mandate. Its head of UK retail Tony Stenning said the funds should be able to generate yields at the upper end of a 4-6 per cent target using covered call options.
But M&G’s Maria Municchi, who works on the firm’s Episode Income fund, said M&G was trying to generate 4 per cent yield because any higher would mean investors potentially sacrifice capital growth.
Firms are also looking to launch new solutions outside of conventional funds.
Mr Stenning said BlackRock was working with life companies and wealth managers to come up with drawdown-like solutions for pensioners.
Meanwhile, Axa Investment Manager’s retirement markets strategist Stephanie Condra said the firm was focusing on “target-oriented solutions”, involving multiple products based on different clients’ needs.
In the past year multi-asset income funds that have been dominating the fund launch landscape as asset managers bet they will be the products investors look for in the new era of pension freedoms.
And asset management firms said their discussions with investors had found a consensus that many wanted at least a 5 per cent income from such funds.
However, research from Investment Adviser using FE data found that out of all the multi-asset funds in the Investment Association universe with at least a 12-month track record, only 13 yielded more than 4 per cent and only three of those generated returns in excess of 5 per cent.
Robin Stoakley, head of UK intermediary at Schroders, which brought its offshore Global Multi-Asset Income fund to the UK market in late 2014, said the vehicle could deliver a 5 per cent-plus yield, but that investors would have to stomach the extra risk of being invested in higher-yielding bonds rather than government or corporate bonds.
Three Counties head of investments and product strategy Andrew Alexander said in the current environment “income investing is the most difficult discipline” and questioned whether newly launched multi-asset income funds would be up to scratch.
The problem, according to Rory Maguire, founder of ratings agency Fundhouse, is that investors may not be satisfied with a sub-5 per cent yield. He added that any funds chasing more would be in danger of “reaching for yield”, exposing investors to too much risk.
Managing income expectations
Aj Somal, chartered financial planner at Aurora Financial Planning, said: “The multi-asset income funds are all facing the problem of unrealistic levels of income, and need to adjust accordingly, whether to maintain the levels or reduce levels going forward without exposing clients to too much investment risk.”
Ms Municchi said the M&G Episode Income fund has received a lot of “push back” from investors who were dissatisfied with the low yield, but she insisted it was necessary to keep it at this level in order to protect and grow capital.
The need to educate investors about the current low-yield environment was stressed by all asset managers, and was highlighted by a recent BlackRock survey that found 81 per cent of people in the baby-boomer generation said they did not know how to get the best income-generating investments.
