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.”