Multi-Assets for the New Pensions Era

Multi-asset funds are an obvious choice for retirees who opt for income drawdown after the April pension freedoms kick in, says Nick Sudbury

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They might not be quite as alluring as a Lamborghini, but multi-asset funds are likely to appear on a lot more pensioners’ shopping lists once the new freedoms come into force in April. Despite the lurid newspaper headlines, most retirees will in fact take the responsible option – with those that are unwilling to accept the low rates available from annuities leaving their money invested and drawing a regular income.

For many of these people, a multi-asset fund may turn out to be an obvious home for their cash. The prospect of long-term capital growth at an acceptably low level of risk, combined with a decent and sustainable yield, is highly attractive.

Indeed, multi-asset funds proved to be the second most popular area amongst retail investors in 2014, attracting a colossal £3.9 billion of new money. The majority are to be found in either the Flexible, Mixed Investment 40%-85% Shares, 20%-60% Shares or 0%-35% Shares sectors. The average returns in each of these areas were almost identical last year at around 5% with UK gilts and US equities the main positive contributors.

Over longer periods the sectors with the higher equity weightings naturally have the better returns. So where should clients be investing their nest eggs?

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Steady Eddie 

Henderson Cautious Managed

Arguably the most balanced funds are to be found in the Mixed Investment 20%-60% Shares sector, where managers are able to tilt their portfolios in favour of either bonds or equities. One of the most consistent of these is Henderson Cautious Managed, which was launched in February 2003 with the accumulation units up around 144% in the intervening 12 years.

 

The £2 billion fund is a top quartile performer over 3 years with a return of 32.2% and has a reassuringly low annualised volatility of 5.73% during the period as measured by FE Trustnet. This sort of steady-as-you-go performance would be ideal for a pension fund in drawdown, especially as there is an income option with a 3% yield and quarterly distributions.

 

Chris Burvil, the manager, has 21 years’ experience running these sorts of mandates and is director of UK equities at Henderson Global Investors. His strategy is to hold a mixture of shares, bonds and cash so as to capitalise on market movements, while avoiding taking on too much risk. The aim is to generate capital growth and income at a lower level of volatility than would be possible from a pure equity fund.

 

At the end of December the portfolio was almost 50% invested in equities with 33% in bonds and the balance in cash. There were just under 200 separate holdings, with the largest weightings being between 2% and 3%. This is an enormous number of securities although it is a large fund with a little over £2bn of investors’ money at stake.

 

2014 was a relatively poor year for the portfolio with an annual return of just 3.6%, although it followed 3 very good years. Despite this, Burvil remains reasonably positive about the prospects for 2015, but he doubts whether it will be an easy year for investors. He plans to navigate his way through it by using his cash to invest on weak days in the markets and by keeping the bond duration short so as to limit the impact of higher interest rates. It is the ultimate sleep-at-night fund and would be ideal for the cocoa and slippers brigade.

 

Fund Facts

Name:                                                  Henderson Cautious Managed

Type:                                                   OEIC

Sector:                                                IA Mixed Investment 20%-60% Shares

Fund size:                                           £2.06bn

Launch Date:                                    February 2003

Yield:                                                  3% with quarterly distributions

Ongoing Charges:                              1.44%

Manager:                                             Henderson Global Investors

Website:                                             www.henderson.com

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Staying UK-Centric

 

Fidelity Moneybuilder Balanced

The Mixed Investment 40%-85% Shares sector has a higher emphasis in favour of equities than the other main multi-asset segments of the market and has the better long-term returns. Over the last 5 years one of the standout performers has been Fidelity Moneybuilder Balanced with a gain of 64.4%. It is also reassuringly consistent having been ranked in the top quartile over 1, 3 and 5 years.

 

Unlike some of the other funds in the sector, the asset allocation is pretty much static, as the official benchmark is a composite made up of 65% of the FTSE All-Share and 35% of the FTSE All Stocks, a UK fixed interest index. It is an interesting split given that the aim is to deliver ‘an attractive regular income with some long-term capital growth.’

 

The equity component is run by Michael Clarke, while the fixed interest portfolio is in the hands of Ian Spreadbury. Clarke looks for companies that can deliver consistent dividend growth with the largest holdings including the likes of AstraZeneca, Glaxo, Imperial Tobacco and BAE, although he cans also invest in smaller and mid-sized companies if he wants to. On the fixed income side, Spreadbury has put together a short duration portfolio to minimise the impact of higher interest rates.

 

The vast majority of the fund is invested in the UK, which accounts for more than 90% of the equity component and 97% of the fixed income. Over 80% of the bond allocation is held in UK gilts, which would be a problem if the historically low yields don’t persist. Most of the rest is in investment grade corporates and virtually all of the currency exposure is hedged back into sterling.

 

Retirees who are dependent on their pension fund for income will be happy to know that Fidelity MoneyBuilder Balanced pays monthly distributions and is yielding a healthy 3.65%. Another welcome aspect is the modest annualised volatility of just over 6%, which is much lower than would be possible from a pure equity mandate. It is a decent sized fund with £458 million in AUM and with two experienced managers at the helm. One small concern might be the extreme UK-centric approach.

 

Fund Facts

Name:                                                  Fidelity Moneybuilder Balanced

Type:                                                   OEIC

Sector:                                                IA Mixed Investment 40%-85% Shares

Fund size:                                           £458m

Launch Date:                                      February 1993

Yield:                                                  3.65% with monthly distributions

Ongoing Charges:                               1.21%

Manager:                                             Fidelity Investment Funds

Website:                                             www.fidelity.co.uk

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Tailored to Fit

 Legal & General Multi-Index 7 Fund

The funds with the most scope to vary their asset allocation are to be found in the Flexible Investment sector, although very few of them pay a high level of income. Clients that are approaching retirement age but who intend to keep working may be interested in a more growth orientated holding like the Legal & GeneralMulti-Index 7 Fund.

 

L&G operates a series of these funds with each designed to match a specific risk profile. Multi-Index 7 is aimed at investors with above average risk tolerance, while at the other end of the scale, Multi-Index 3 is for the more risk averse, with all of them providing exposure to a wide number of asset classes by using L&G’s regional tracker funds.

 

Each product in the Multi-Index range is based on a robust risk management framework to ensure that it remains suitable for its investors. The portfolio construction also reflects L&G’s medium and long-term views of the markets in an effort to ensure that the risk is allocated to those areas most likely to generate the best returns.

 

Currently the largest allocation is to overseas equities, which make up 53% of the fund, with the emerging markets accounting for 16%, North America 13%, Europe 9%, and the other 15% divided between Japan and the rest of the Pacific Rim. UK equities make up another 31%, on top of which there is 10% in fixed income and 6% in UK property. The money is divided between 11 L&G regional trackers, although on a look-through basis this encompasses an incredible 4,573 underlying securities.

 

Multi-Index 7 is a relatively new fund having only been launched in August 2013 and it is still small with just £17.6 million in AUM. In 2014 it returned 6.74% making it a top quartile performer. The annualised volatility is 7.68%, which reflects the fact that it is designed for those who can tolerate higher levels of risk. It has a modest historic yield of 2% with the income distributed twice a year and very low ongoing charges of 0.32%.

 

Fund Facts

Name:                                                             Legal & General Multi-Index 7 Fund

Type:                                                   UK Unit Trust

Sector:                                                IA Flexible Investment

Fund size:                                           £17.6m

Launch Date:                                      August 2013

Yield:                                                  2% with bi-annual distributions

Ongoing Charges:                               0.32%

Manager:                                             Legal & General Investment Management

Website:                                             www.landginvestments.com/multi-index