Pension FreedomOct 9 2018

How to help clients choose the right income fund for retirement

  • Learn what impact the pension freedoms have had on retirement provision.
  • Consider how income funds can help clients to fund their retirement and the risks that these bring.
  • Understand how ratings can help advisers to find the best income funds for their clients.
  • Learn what impact the pension freedoms have had on retirement provision.
  • Consider how income funds can help clients to fund their retirement and the risks that these bring.
  • Understand how ratings can help advisers to find the best income funds for their clients.
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CPD
Approx.30min
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CPD
Approx.30min
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CPD
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How to help clients choose the right income fund for retirement
  • The fund’s historic capital and income volatilities
  • The maximum capital drawdown that the fund has seen
  • The consistency of the fund’s annual income payments
  • The fund’s asset allocation
  • The name and mandate of the fund
  • Discussion(s) with the fund manager.

This analysis will be reviewed every year for each fund that Defaqto rates with the latest numbers and information to ensure that the rating given to the fund is still accurate on an ongoing basis. If it is no longer accurate, Defaqto would look to change the rating.

Ratings

As well as rating income funds from a suitability point of view, Defaqto also produces ‘Diamond Ratings’ based on the perceived quality of the income fund.

So that Defaqto is comparing like for like when producing its ratings, it has divided income funds into the following categories of equity income funds, bond income funds and multi-asset income funds.

It then ranks the funds in each of these three sub-universes on the basis of:

  • Capital batting average - how often the value of the fund has been at or above its initial value.
  • Conditional Sharpe and Calmar ratio - these are two different measures of risk-adjusted performance.
  • Delivered yield.
  • Income volatility.
  • Rolling conditional Sharpe and Calmar ratios - measures of how consistent the above risk-adjusted performance has been.
  • Average rolling batting average and forward yield.
  • Dividend payment delay, where those funds taking more than the regulatory limit (four months) to deliver dividends to the investor are penalised.
  • Fund manager tenure - a feature of many successful offerings is longevity of people and resource.
  • Ongoing charges.
  • Size of fund - it is generally accepted that most funds are not particularly profitable or comfortably sustainable until they reach a certain size; while funds that are too large will find their size impacts on investor returns due to liquidity and market impact issues.
  • Overall size of the underlying fund management group.
  • Ucits compliance - a key plus for any fund today is having Ucits status as it gives investors some assurance that certain regulatory and investor protection requirements have been met.
  • Domicile - funds registered within Britain will enable investors to access the Financial Services Compensation Scheme (FSCS) if necessary.

The fund receives a score for each of these criteria on the basis of how it compares to peers for that measure. These scores are weighted by how important Defaqto believes each of these criteria are and then added up to give an overall score, which translates into a Diamond Rating, with 5 Diamond indicating best in its class and 1 Diamond being the worst.

More solutions bring greater risks for investors

The changes announced in the 2014 Budget have sought to give more responsibility to the individual in terms of retirement provision.

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