Wise urges caution over alternative pension strategy
The IFA says Schroder Secure Distribution 2032 could eventually prove to be useful for investors worried about the security of their income, but it is in unchartered territory at the moment.
Gemmell Financial Services’ Chris Wise has urged investors to approach the newly launched Schroders Secure Distribution 2032 fund with caution.
It is marketed as an alternative to more traditional pension products and will split its 20-year life into two stages: a 10-year accumulation phase, and a 10-year drawdown phase in which it will pay out an income that is 7.5 per cent of the highest value it has reached.
The multi-asset fund aims to provide an alternative source of pension income, avoiding the falling annuities and risky markets that currently threaten drawdown plans.
Wise says that this product is different to what is currently available, but investors should watch the fund’s capital growth over the next few years before deciding whether to invest.
"Multi-asset products are becoming more popular and Schroders is trying to be innovative to help advisers with their clients’ pension concerns," he commented.
"Investors should probably wait and see how it develops and how it builds up capital in the coming years. I would see how it fares over the next 12 months and then decide whether to hold it as a pension strategy," he added.
"Advisers have to maintain a close relationship with their clients and decide whether to go to cash or a drawdown policy."
"It seems investors can either go for a fund that ticks the multi-asset fund or a lifestyle platform. Here we see Schroders saying to advisers, 'we have a different approach where this job is done for you'."
The fund’s manager, John McLaughlin, claims many of the more traditional pension funds are unsuitable for the current environment.
"Annuity products are very unattractive at the moment," he explained.
"Whilst they do give investors a guarantee, annuity rates are intrinsically linked to interest rates and these are currently very low. This is therefore putting investors off them."
"Of course, drawdown products have good growth potential, but the investment assets are in the hands of pure equity risk. Whilst we like equities, it is a risky investment policy when you are concentrating on retirement."
Wise says that prospective investors can draw encouragement from Schroders’ good track record in this area.
"I think Schroders can use the success of its Income Maximiser
funds to gain a lot of traction and investor support and there isn’t anything quite like this in the investment sector."
Schroders launched its Income Maximiser fund, headed up by Thomas See, in November 2005.
According to data from FE Analytics, it has £764.5m worth of assets under management, and blue-chip corporates Vodafone, AstraZeneca and GlaxoSmithKine make up three of its top-10 holdings.
Since the fund’s inception in 2005, the portfolio has had good returns compared with its sector average and has slightly outperformed its FTSE All Share benchmark.
It has returned 44.98 per cent during this period while the FTSE All Share and IMA UK Equity Income sector have returned 43.96 per cent and 34.34 per cent respectively.
Performance of fund since launch vs sector and index
Source: FE Analytics
However, Wise points to recent problems with the fund that give some cause for concern.
"Yields have been decent, but the numbers before the last six or 12 months have shown the fund has had poor market and capital returns."
"Therefore, what will happen if Schroders Secure Distribution 2032 has poor capital returns because it has to pay back the 7.5 per cent in the second phase?"
Schroder Secure Distribution 2032 was launched in June 2012. It has a finite 20-year lifespan but is legally a unit trust. While the final payout is planned for 2032, clients can withdraw at any stage during the investment process.
If there is a period of market underperformance, McLaughlin says he will sell and hold a proportion of the assets in cash.
He stressed the multi-asset nature of the portfolio.
"Although we invest in equities, we also have exposure to commodities, fixed interest and real estate."
"Our policy is one of diversified growth, we look to blend different assets with uncorrelated performances in an attempt to maintain steady growth at a low-risk level," he finished.