Income strategies for the way in and the way out

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Rathbones
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Supported by
Rathbones
 Income strategies for the way in and the way out

While multi-asset funds are used successfully for both the accumulation and the decumulation stages of a client's life, there are potential pitfalls along the way, not least the fact the individual's own lifestyle might endure the slings and arrows of outrageous fortune both pre- and post-retirement.

Therefore, it is important to understand how advisers, discretionary fund managers (DFMs) and fund managers can create a sustainable multi-asset investment strategy that works both for a client when accumulating their pension, and spending that money in their retirement.

Joe Roxborough, chartered financial planner for Ascot Lloyd, comments: "When you are accumulating your assets, the ebb and flow can be ignored, and often be seen as an opportunity to double down while prices are low.

In order to make the fund sustainable, the manager should not aim for too high an income. Patrick Norwood

"When taking an income, however, you will likely have fewer options, so being able to take profits from something that has held up during a market drop - rather than being forced to sell low - is the aim of the game."

So, how can advisers/managers create a sustainable MA fund for accumulation and decumulation?

All about the client

For Bob Szechenyi, investment director for Rathbones, it all comes down to the client. He explains: "This essentially comes back to a holistic fact-find of investors’ objectives and developing a strategy to meet those individual requirements.

"The benefit of a truly diversified multi-asset portfolio is that in times of market distress, all of the assets are working in different directions and hence providing an element of protection on the downside.

"Income is, of course, an important part of these strategies and the sources of this should also be diversified, for example via a combination of equities, through quality cash-generative companies, fixed income and property vehicles."

Mr Szechenyi says the team wants to ensure what it offers is long-term and sustainable, and from a diversified source, with differing geographical and/or currency exposures.

"Creating these strategies is always about knowing your client, understanding their circumstances and ensuring their risk appetite and the strategies are the right fit," he adds.

Whether the multi-asset portfolio is being managed for someone at the start of their accumulation journey or towards the beginning of their decumulation period, Mr Szechenyi is adamant that the portfolio needs to be robust.

Different approaches

While the investment managers are keen to ensure the multi-asset portfolio provides the right sort of return on the way in and works for the way out, even with income being taken from the fund, advisers are keen to stress that there should be slightly different strategies employed - depending on the individual client - to make sure the fund lasts as long as it is needed to last.

Tim Morris, IFA for Russell & Co Financial Advisers, says the 2017 York study, Decumulation, Sequencing Risk and the Safe Withdrawal Rate, had some interesting conclusions with regard to diversification.

He comments: "Investing heavily in equities may work for many in accumulation, yet perhaps not in decumulation. This is where pound cost ravaging could really have an impact in the not-too-distant future. Just think how those who’ve piled money out of defined benefit (DB) pensions will feel when they see their projected income fall."

Creating these strategies is always about knowing your client, understanding their circumstances and ensuring their risk appetite and the strategies are the right fit. Bob Szechenyi

His admonitory words about pound-cost-ravaging echoes those of Abraham Okusanya, principal of FinalytiQ, who has warned that "a combination of sequencing risk and volatility drag is exacerbated by portfolio withdrawals, resulting in 'pound cost ravaging'."

For Mr Okusanya, a combination of these three creates a perfect financial storm, which he says "renders deterministic cashflow models meaningless and potentially misleading for clients".

In his 2015 White Paper, Understanding Volatility Drag, Sequencing Risk and Safe Withdrawal Strategy In Retirement Portfolios, Mr Okusanya advocates advisers use Monte Carlo stochastic models and a greater understanding of safe withdrawal rates.

He says: "These enable financial planners to model retirement income options more robustly, demonstrate suitability and deliver better client outcomes in retirement planning."

Sustainability

For Patrick Norwood, insight analyst for Defaqto, advisers need to keep a weather eye on the managers to make sure that the funds chosen for clients are always suitable and sustainable, regardless of whether they are being used for accumulation or decumulation.

He explains: "There is a trade-off in income funds between preserving capital and achieving a high income. 

"Therefore, in order to make the fund sustainable, the manager should not aim for too high an income."

"The need for diversification", says Mr Roxborough, "becomes even more important when using a portfolio to provide an income, as your investments now need to provide you with a steady stream of returns rather than big ups and downs, which is precisely what diversification seeks to achieve."

Mr Roxborough strongly advocates making sure the portfolio is diversified enough to minimise the chances of the portfolio losing significant amounts of capital.

"This means clients are less reliant on a single company which may pay an attractive yield but has dividend cover issues, which could prevent it from offering a long-term, sustainable dividend," he adds.

simoney.kyriakou@ft.com