As investors gain the freedom to take money out of their pensions, advisers are expecting greater product innovation, particularly in the multi-asset arena, and greater use of institutional strategies reinvented for the retail investor.
Fund group executives will be kept busy deciding whether a complete product overhaul is necessary or whether they should just reposition existing products.
According to Fidelity FundsNetwork’s Adviser Class of 2015 survey, 79 per cent of the 209 firms that responded saw a need for new products and investment propositions to help investors secure an income stream in retirement.
Lee Robertson, chief executive of London-based wealth manager Investment Quorum, says his firm, having discretionary powers, prefers to build portfolio solutions itself, though many off-the-shelf multi-asset funds are “probably fit for purpose”, adding that “there are far more funds that are more appropriate for accumulation than decumulation”.
“That said, my heart always sinks a little as I really don’t think we want to be launching more products when there are already so many that don’t do what they are supposed to do.”
Mr Robertson says the industry historically has focused on accumulation because clients more often than not have used a life company solution for their decumulation phase. But, he adds, “it is changing, so it might be just a case of asset managers repackaging some existing products”.
The need for a reliable income stream, protection against inflation and a degree of capital growth – either to enjoy or pass on to the next generation – will apply regardless of when clients retire but has become a greater challenge to achieve.
Previously, the method of lifestyling, which involves moving a greater proportion of an investor’s portfolio into bonds and out of equities as they near retirement, may not be the most sensible strategy, given exceedingly low bond yields.
Alan Burnett, director at Lyxor Asset Management, says because lifestyling was designed to meet widespread annuity purchase at a certain age, people ended up divesting their assets based on how old they were, rather than on their financial requirements or what was going on in markets.
He concedes such a strategy would be effective when seeking a lump sum much later in life, for example. “If you had five years to live, were still fully invested and a 2008-style situation came along, you’d be pretty stuffed,” he says, adding the solution lies in outcome-oriented strategies.
Regardless of whether investors opt for a diversified growth fund, multi-asset income solution or absolute, targeted or directional return strategy, Mr Burnett says the basic premise ought to be seeking uncorrelated returns.
Christopher Mahon is director of asset allocation research in the global multi-asset group at Barings, which recently relaunched the Dynamic Capital Growth fund. He is mindful of the delicate balance between diversification and cost, saying the fund was designed to “mimic” Barings’ traditional multi-asset portfolios using passive underlying investments.
He says this was done in an attempt to fall within the 0.75 per cent charge cap affecting products designed for auto-enrolment and implemented this month.
“The charge cap… is great for investors but will constrict portfolio construction,” Mr Mahon suggests. “For instance, it will prohibit the use of some alternative asset classes. We won’t be able to use third-party managers or apply active stock-picking, but we can say it is in the spirit [of pension freedoms].”
But with government bonds yielding little, he recognises the benefits of these alternatives for diversification and income generation. While they can be more expensive, Mr Mahon thinks they are worth it.
“It depends on the structure,” he says. “Sometimes they are more expensive than government bonds, but if you are receiving 8.5 per cent in dividends every year, you will still get a decent net return.”
One asset class the Barings team favours for its lack of correlation and slow steady income stream is the aircraft-leasing sector. “We have taken some large positions in aircraft,” Mr Mahon says. “Plenty of capital in that space dried up after the credit crisis and we were able to step in and provide that type of funding. You often get 12-year-plus leases. It’s a very steady form of capital.”
He concedes these esoteric investments are unlikely to feature in the Dynamic fund but hopes its dynamic asset allocation approach will entice the annuity audience. “We can move large chunks from equities to bonds in a matter of days,” he says.
“We have a 12-18 month investment horizon. With the potential for risks to rise over that time frame, it is important to be able to change our allocation quickly to protect on the downside so people don’t see the value of their pension funds wiped out.”
BNY Mellon subsidiary Newton is another group entering this space. Catherine Doyle, head of defined contribution at the parent group, believes it is unnecessary to turn to passive investing, describing the use of investment trusts, for instance, in Newton’s newly launched Multi-Asset Income fund.
She says of the charge cap: “It has had implications for active managers because it is a constraint we have to work within.”
She adds: “We want to provide value for money [for investors] and don’t feel they should be driven to accept strategies that are narrower in their remit or passive. Active should still play a part.”
