Revamping multi-asset funds ahead of April 2015

He says the new regulations allow retirees the freedom to choose how their pension pots are invested from April this year, so alternative investment solutions to poorly perceived traditional options such as annuities will be in high demand.

Mr McPherson says: “This is a massive change. There is no longer an obligation to buy an annuity. This will likely result in increased demand for multi-asset funds in preference of annuities.

“In a world where guaranteed annuities become less popular [due to poor rates], demand will likely increase for products that provide a discernible outcome that means something to an investor; hence the increase in ‘cash plus X per cent’ target products.”

Many existing multi-asset funds are not directly suitable for the new world of targeting a specific client outcome, says Nick Samouilhan, multi-asset fund manager at Aviva Investors.

Old balanced managed type funds, for example, aim to beat a peer group or a fixed benchmark, whereas Mr Samouilhan argues clients today are interested in specific fund outcomes, whether a specific return, yield, or risk appetite, and not relative success.

As such, Mr Samouilhan says legacy funds are not usually designed to offer the new needs of clients and that is why we are seeing new funds being launched.

According to Mr Samouilhan the first new type of funds are risk targeting, which aim to generate the highest return while keeping to a specific risk appetite.

The second is a move to outcome-orientated funds that deliver regardless of markets, (deliver a return whether the FTSE is up or not, for example), which Mr Samouilhan says necessitates a greater degree of sophistication and a move to ‘multi-strategy’ funds.

Vincent McEntegart, manager of the Kames Diversified Income fund, says managers are adding more specific income criteria to funds, so potential investors can get an idea of how much these “replacement” products can deliver versus, for example, an annuity.

As well as adding specific income targets, Mr Entegart says we could also see fund groups stress the defensive nature of multi-asset funds and how they can protect capital while delivering an income.

Their key drawback for smaller pot investors in particular is the risk they carry, which however well managed is 100 per cent more risk than conventional annuities represent.

He says: “Fund managers will need to make clear that while their income solutions are attractive alternatives to annuities, they do not provide guarantees. The investor will need to decide if absolute certainty matters most or if they can accept some uncertainty in pursuit of a higher income.

“Retirees buy annuities because they guarantee an amount of income for life. The company providing the annuity will invest the annuity purchase amount in government and corporate bonds and will make a charge for the risk that the annuity buyer lives longer than expected.

“With returns on bonds at very low levels and people living longer the cost of buying a guaranteed income for life has never been higher. The expectation is that multi-asset funds could be seen as a very attractive alternative for retirees who need a sustainable income but also want (or need) to stay invested in markets.”

The majority of fund managers are creating or converting existing funds to a form of distribution/retirement offering, says Peter Toogood, investment director at City Financial.

Mr Toogood says advisers should expect the offerings to expand in number to capture the opportunity presented by the changes.

He says: “Recognised multi-asset fund managers generally have a diversified/distribution offering in their stable already. Those that have not are morphing existing funds to a more diversified/yielding strategy.”