How are multi-asset funds being used for retirement?

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Aviva Investors
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Supported by
Aviva Investors
How are multi-asset funds being used for retirement?

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.

As members move through retirement, so the balance of their needs between capital growth and income generation can change. Altaf Kassam

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.

“For example, within the Mixed Investment 20-60% Shares, one fund could hold 25 per cent in equities, while another could contain 55 per cent, and these would almost certainly give very different outcomes in terms of risk and return.”

So while there is plenty of choice for advisers and their clients, finding an appropriate multi-asset fund for the accumulation, and the decumulation stages of a client’s life can be much more complicated than it might seem.

General use

Not all respondents to this special report believe the recent rise in multi-asset fund launches have been as a result of the pension freedom and choice regime.

It is possible to manage clients’ expectations better with a multi-portfolio approach, and this can sustain trust when times get tough. Nick French

Rather, they believe the uncertainty of markets and memories of the 2008 market crash, when all assets seemed to be correlated to some degree, makes multi-asset a good choice for all investors, irrespective of their age.

Eugene Philalithis, portfolio manager, Fidelity Multi Asset Income, says: “I’m not aware of multi asset ranges being launched for retirees specifically, though obviously many income ranges are designed with pensioners being front of mind.”

He explains that the forerunner to the Fidelity Multi Asset Income was called the Fidelity Retirement Income Fund and was originally designed to offer a higher income in retirement than cash or other low risk investments (back in the days when cash still yielded 5 per cent or so).

“But with the onset of the financial crisis, we repurposed the fund to address the different needs of income seekers. With low yields affecting investors across the spectrum, income funds can potentially be of use to younger investors too, who want a relatively safe option to invest in,” Mr Philalithis comments.

He adds: “I don’t explicitly look at how well other funds are serving retirees, but I think a key focus over the next few years will be how multi-asset funds protect retiree’s capital on the downside. 

“We are relatively conservatively positioned, and think the next few years could be challenging as central banks try to unwind accommodative policy and the Chinese authorities try to rebalance their economy, all in the context of historically high valuations across asset classes.”

Other approaches

For some investment houses, one multi-asset fund does not meet all needs in accumulation or decumulation. So why not use several multi-asset funds?

Nick French, head of UK wealth management and managing director of Russell Investments, believes the management of a single pool of assets, with the aim of meeting all of a person’s later life needs, is a “touch proposition”. 

By this he means it is merely a suggestive proposition that might not actually work in the client’s best interests, depending on their circumstances.

Instead, Mr French advocates: “We feel it makes sense for an adviser to create several portfolios, each with different goals and specific risks.”

He explains that an adviser could create a series of risk-rated multi-asset funds that reflect the various stages of a client’s needs.

He describes these as: one for ‘essentials’, that would cover things such as heating bills, healthcare and food; lifestyle, designed to maximise a client’s discretionary income; and estate, a long-term horizon portfolio created to help build an estate for the benefit of family, as well as friends and charity.

This will help maintain longevity – not just of the investment strategy, which will help for long-term savings objectives such as funding retirement – but also longevity of the client-adviser relationship, Mr French believes.

He adds: “By splitting into three discrete portfolios, you’ll be able to better manage the market’s ups and downs. It is possible to manage clients’ expectations better with a multi-portfolio approach, and this can sustain trust when times get tough.”

simoney.kyriakou@ft.com