In addition, there is a clear connection between the clear objectives set out for different parts of the pension journey and the outcome-orientated nature of multi-asset solutions, creating a natural pathway for advisers and their clients towards these products.
Indeed, a key benefit is the capacity the multi-asset manager has to blend a wide range of options in a flexible way to help the client achieve their goals over the investment lifecycle.
“With pension planning there are more defined objectives and the client needs the certainty of the outcomes to be higher. That has to be taken into consideration when approaching multi-asset solutions,” states Andrew Harman, senior portfolio manager, multi-asset solutions at First State Investments.
“Earlier in the investment, the client can take on more risk and as they get closer to the end goal, capital preservation becomes more important.
An actively managed multi-asset strategy targeting absolute returns could be increasingly beneficial towards the later stages of a DC lifecycle. Elena Zhmurova“As there is a range of options available, the manager can make the best choice over the investment cycle. For example, at the moment, sovereign bonds are not delivering as well as they have in the past.
"However, within multi-asset, other assets can be used to fulfil that part of the portfolio. For instance, investment grade credit or emerging market government bonds. There is a great deal of choice and flexibility.”
For Claire Felgate, head of DC at BlackRock, it is easy to see how multi-asset lends itself well to pension planning, where downside risk is pivotal and outcomes need to be closely bound with the clients’ requirements.
“If we consider how multi-asset is different from other options, the funds and strategies are outcome-orientated, which is important for pension planning,” she says.
“In those first conversations we have with clients we try to determine what their aims are and then look at how best to invest to achieve those goals and it is clear to see that considering multi-asset solutions can make sense when looking specifically at reaching certain outcomes.”
In a white paper authored by DC strategist Elena Zhmurova, Invesco considered how multi-asset – specifically diversified growth funds (DGFs) – was appealing within DC portfolios because of the potential combination of growth, diversification and reduced volatility within a single product.
It warns, however, that not all products are equal and it is down to the individual to consider whether the end product is in line with the individual client’s needs.
Ms Zhmurova says: “Despite targeting similar objectives of delivering equity-like returns but with lower volatility than global equity markets over time, DGFs can differ significantly in terms of investment philosophy, asset allocation, range of asset classes deployed and the portfolio manager‘s area of expertise. Therefore, outcomes for members can vary.
“A key consideration for selecting a DGF for a DC plan is its diversification characteristics in relation to other return drivers in the glidepath and the risk/return profile relevant for the members in that phase of the lifecycle.
"We would argue that an actively managed multi-asset strategy targeting absolute returns could be increasingly beneficial towards the later stages of a DC lifecycle, especially if it can show low correlation with broad market returns and a higher potential for capital preservation.
"An absolute return multi asset strategy can also help calibrate the overall risk/return profile of the portfolio more precisely by starting in the growth phase and gradually increasing in allocation towards the end of the glidepath.”
Ms Felgate agrees that the requirements of the client change over time and, moreover, since the introduction of greater pension freedoms, the journey for many clients has changed course.
While the general strategy of taking on more risk earlier on before switching to a more defensive portfolio nearer to retirement still stands, the removal of the requirement to take out an annuity at age 65 and the decision by many to stay invested means the time horizon can increase by 25-30 years.
“People tend to approach that extended journey in a number of ways,” she explains. “On one hand, some people will be willing to take on more risk as they see that the horizon is longer.
However, for others, they remain very risk-averse and may want to increase the defensive characteristics of their portfolio. However, one thing to consider is, with the rate of cash so low, moving into cash in the 10 years leading up to retirement can have a negative impact on overall performance.
Equally, however, they may not want to take on excessive equity risk. In this instance, multi-asset can play a part in managing growth within a controlled risk framework.”
Indeed, looking at changing demographics and life expectancy, we can expect to see more people using multi-asset strategies in the future to continue with a growth objective because of the continued need for a return into later life.
Similarly, we can anticipate further development in the focus on income within multi-asset to help meet clients’ changing needs as the pensions horizon becomes less clear but, perhaps, richer with opportunities.
Laura Mossman is a freelance financial reporter
