Multi-assetFeb 1 2016

Divide up assets to reduce the risk

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Divide up assets to reduce the risk

In the wake of the government’s pension reforms, asset managers set about either repackaging existing multi-asset income strategies or launching new multi-asset income ranges in a bid to corner the retirement income market.

These funds are being heralded by many fund houses as the panacea to the problem of where to find retirement income in a world where yield is scarce.

As Lorna Blyth, investment strategy manager for Royal London’s pension business, points out: “Most traditional pension products in the market are designed for accumulation or growth, where arguably some volatility can be advantageous – particularly if regular payments are being made over a long period of time.

“Multi-asset income funds have a different objective – they are typically for a shorter time period and the fund value can be particularly affected by market falls or big one-off withdrawals, so ideally the investment strategy and underlying asset mix needs to deliver growth, but with reduced volatility to lessen the impact of market events.”

She explains: “Traditionally, pension income payments have been funded by the yield from a portfolio of income-producing assets, often equity-based with some high-yield bond assets in the mix. However, the introduction of the pension freedoms has seen drawdown firmly move into the mass market, and with it has come a raft of multi-asset income products designed to deliver sustainable income.”

Tony Stenning, BlackRock’s head of retirement, admits it is difficult to find natural yields from traditional sources of investment.

“That is why people typically had a lot of bonds, because they were less volatile and they’d provide the income,” he recalls. “Now, they’re not doing that. So the only way you can really do it is to use multi-asset strategies to enable you to still get natural yield from portfolios and a combination of maybe drawing a little bit of capital.”

He refers to multi-asset strategies as the “growth engine” around which retirees could allocate other products to meet their retirement needs.

You’ll see pensioners who have a larger pot of assets dividing up their assets and investing them slightly differently to meet slightly different goals Katie Roberts

“Are they the entire solution? Probably not. But they can form a very nice core part of that proposition,” he suggests.

But is there really enough demand for the slew of multi-asset income products now available?

“While there has been a boost in the number of funds I don’t think we are near saturation point, as increased volatility in leading stockmarkets and increasing expectations of dividend cuts in some sectors, particularly oil and energy, drive a need to diversify a yield,” replies Axa Wealth’s head of investing, Adrian Lowcock.

He hastens to add that the 4 or 5 per cent yield promised by some newly-launched multi-asset income funds, while achievable, cannot be guaranteed.

“However multi-asset fund managers have choice, and the ability to switch between markets. The risk is that managers chase yield to meet expectations. Managers should look to protect capital first and a growing income second,” Mr Lowcock notes.

Katie Roberts, investment director at Fidelity International, says: “I think that’s the difference between an annuity and a multi-asset income product. [With] the annuity your income is guaranteed and you pay a price for that. So annuities are more expensive, but obviously they come with that absolute cast-iron guarantee that you will receive that particular level of income in perpetuity.”

She accepts a single strategy is now unlikely to meet all retirement needs, but that an annuity may be more suited to those with smaller pension pots.

“We think you’ll see pensioners who have a larger pot of assets dividing up their assets and investing them slightly differently to meet slightly different goals,” she explains.

“So what you may end up with is a pensioner who puts some of their pot into an annuity to meet their regular bills, puts the rest of it into some sort of income-drawdown solution, and keeps some of it in cash.”

The number of new multi-asset income products highlights the amount of choice for those in or approaching retirement, and the need for investors to seek advice and do their research.

“What the freedoms have done is allow retirees to think very carefully about what their retirement will look like and have flexibility on how they spend their hard-earned savings,” says Ms Roberts.

Ellie Duncan is deputy features editor at Investment Adviser

EXPERT VIEW

Tax implications

Paul Latham, managing director at Octopus Investments, says:

“Changes have recently been announced which allow individuals to draw down more capital from their pensions, effectively giving investors the freedom to invest that capital elsewhere.

“In addition, as of April 2016, the annual and lifetime pension allowances are being restricted. These changes mean that some investors may wish to consider alternative, tax-efficient ways to invest their money if they want to take advantage of the pension flexibilities and/or are likely to hit one of the pension allowance limits.

“One possible option available will be to consider Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) investments, as with their attractive tax benefits – and, in the case of VCTs, the possibility for tax-free dividends – they have the potential to complement existing retirement portfolios.

“However, investors should understand that VCTs and EIS products are higher risk investments because they invest in smaller companies, and for the same reason they are not to be considered as a replacement for pension investments.”