Multi Asset June 2017  

How pension freedoms boosted multi-asset investment

  • To understand why pension freedoms has affected investment choices.
  • To learn what multi-asset can do to help drawdown investors.
  • To ascertain the pros and the cons to using multi-asset in retirement.

“Don’t be tempted into inappropriately risky assets. Allow for a flexible asset allocation policy, and at the outset set a risk budget that the investors can live with.

"A successful investment is one which maximises return consistent with a risk budget. Among other things, this means keeping disciplined and sticking to an agreed strategy to avoid being tempted into behavioural bias, which has proven to lead investors in at the top and out at the bottom, which of course compounds any losses.”

However Peter Lowman, chief investment officer at Investment Quorum, warned clients’ needs must be matched up by a full financial plan to ensure that whatever products bought will deliver those needs, taking into account important issues such as the clients risk appetite, time horizon and income requirements.

“Clearly, multi-asset investments do give you diversification, on a risk-adjusted basis, which in certain cases will meet specific critiera; however, this should not be seen as a “one stop shop” for all,” he said.

Multi-asset vs annuities

With retirees shunning annuities in favour of drawdown, are multi-asset funds a substitute for the much maligned guaranteed income product?

Paul O’Connor, head of multi-asset at Janus Henderson Investors, says multi-asset funds should be seen as alternatives to annuities, rather than substitutes.

“While security of income is the defining feature of annuities, multi-asset funds give retirees the option to explore other investment objectives, trade-offs between income generation, capital appreciation and the scope for retaining a lump-sum investment pot at the end of the pensioner’s life.

“Multi-asset funds can work well to complement annuities, with the annuity providing a secure income stream and the multi-asset fund offering potential for capital growth.”

Chris Teschmacher, multi-asset fund manager at LGIM, says while multi asset funds can diversify their risks and seek income from many different sources, they do introduce risk and do not provide the same level of guarantee that an annuity can. 

“However, with the cost of those guarantees saved, efficient multi-asset funds can provide good value to retirees.

"In addition, if the full capital value of the multi-asset investment is not drawn down by the retiree, there will be assets left in the estate to pass on to future generations via inheritance – a benefit over an annuity.”

However Gretchen Betts, managing director at Magenta Financial Planning, argues that despite current poor rates, annuities still have a place when ill health or other client objectives indicate this is suitable. 

“Pension fund strategies always need to be considered in the wider context of the individual’s financial plan, not just as an isolated pension pot alone.”