Post-pension freedoms, more pensioners are looking for better ways to invest their money during retirement, in ways that can provide a regular, steady income while also benefiting from asset growth.
Paul Ilott, director of multi-asset research at Scopic Research – part of The Adviser Centre – says multi-asset income product launches, aimed at capturing the retirement income market, have seen a “marked increase” over recent years.
He comments that to meet the demand for more flexible investment schemes post-retirement, these ‘new wave’ of multi-asset funds have specified income yield targets, with income being distributed either on a quarterly or monthly basis.
Figures from analysts Defaqto back up this claim of a rise in the number of multi-asset and managed funds.
According to its latest numbers, from 2016, UK investors now have a choice from:
- 310 multi-manager funds.
- 229 multi-asset funds investing directly in securities.
- There is £62bn invested in multi-manager funds.
- Some £122bn is now invested in multi-asset funds.
According to Mr Ilott: “Monthly income distributors tend to operate a smoothing distribution effect that aims to deliver broadly equal income payments throughout the accounting period, with a balancing payment at the end.
“Obviously if the income yield alone is to be sufficient to generate a reasonable retirement income, it generally needs to be at a moderately high level.”
Altaf Kassam, EMEA head of strategy and research for State Street Global Advisors, agrees. He says: “Pension freedoms have given investors options outside of annuities to invest in post-retirement.
“As members move through retirement, so the balance of their needs between capital growth and income generation can change, which transformation can be best served by asset allocation shifts in a multi-asset portfolio.”
However, for Dan Kemp, chief investment officer for Morningstar Investment Management Europe, bond income is an “elephant in the room”, and he believes simply having a high allocation to bond funds in a multi-asset portfolio is not the answer for pensioners who want to remain invested in retirement but draw an income as well.
He comments: “Many pensioners have high bond allocations and have been led to believe a 4 per cent safe withdrawal rate applies.
“The advancement of income-focused solutions and real return solutions could be better placed to meet retirees’ needs. Real return is especially well-placed, as a targeted return after inflation may align directly with the pensioner’s objectives and help them stay the course.”
What flavour of multi-asset?
But where can advisers find multi-asset funds in the first place? The Investment Association has five sectors for multi-asset funds:
- Its new Volatility Managed sector.
- Mixed Investment 0-35% Shares.
- Mixed Investment 20-60% Shares.
- Mixed Investment 40-85% Shares.
- Flexible Investment.
According to Patrick Norwood, insight analyst for funds at Defaqto, this makes the choice for advisers and their clients almost overwhelming, especially as the funds within each sector can have very different characteristics and asset mixes.
He says: “The Investment Association sectors can give some indication to an adviser as to how risky a multi-asset fund might be, but there can be a great deal of dispersion within a sector.