One of the most welcomed of reforms surrounds annuities. From April next year, investors will be able to take as much as they like from their pension pots as a lump sum without fear of punitive tax charges, only paying the marginal rates on their withdrawals.
Annuities aren’t currently mandatory, but there has never been the option to take the cash before. Given they are tied to the performance of gilts, whose record low yields are putting many investors of at the moment, experts predict that many will opt out of taking an annuity. Some forecast the annuity market will shrink by up to 90 per cent.
Ben Willis of Whitechurch Securities says the reforms have caused the “flood-gates to open”, as investment providers will now be looking at possible alternatives to annuities.
“Income is the key of course, but it’s also about capital preservation,” he said.
“The sweet spot would be a GARS-type vehicle that pays an income, but generating an income is very difficult when you’re looking to keep volatility that low.”
Threadneedle has been one of the first to react, launching the Global Multi Asset Income fund yesterday, in what it claims to be a direct response to the recent UK pensions reforms. Managed by Toby Nangle, the fund aims to deliver a growing income, as well as capital growth.
Early indications suggest it will sit in the IMA Mixed Investment 20-60% sector, investing in equities, bonds, cash, property and other alternatives. Protecting on the downside will be a big priority.
“Companies like Threadneedle will be entrusted with ensuring retirement assets are appropriately preserved and growth in excess of inflation is achieved, while also ensuring enough income is available to live on,” said Nangle.
“This fund offers investors the opportunity to diversify their investment pot by delivering income and returns from an appropriately balanced range of assets.”
Willis sees the launch as a “bit of a marketing ploy”, pointing out that the fund was most likely in the pipeline before the Budget was announced in March. However, he does think multi-asset income could be a high growth area in the market.
Howard Bullock of Clear Financial Advice agrees, but thinks that funds such as this need to prove that they can deliver the goods.
Multi-asset income is a popular asset class in the US, but there are significantly less in the UK with a proven track record.
“These funds will certainly grab some attention because of the changes, but because they are quite innovative and will have to tick a lot of boxes, I would probably want to sit back and watch them before recommending them to clients.”
“The most important thing is a sustainable income, but of course weathering volatility and making sure the lump sum doesn’t disappear is very important.”
There are a handful of multi-asset income funds with a reasonable track record.
Here are four more that investors may want to consider as an alternative to annuities in the coming years.
Henderson Multi-Manager Diversified
This four-crown rated fund is held in a high regard by the FE Research team, who see it as a heavily diversified, low-risk option for investors looking for income and growth.
FE Alpha Manager Bill McQuaker and his team have only had a specific emphasis on dividends over the past two years or so. They are paid out quarterly.
A £1,000 investment in June 2012 would have seen investors pocket £61.45 today. This is less than the average UK Equity Income fund, which has managed closer to £90, but capital protection has been significantly better.
FE data shows that the Henderson fund has returned 20.88 per cent over the period with a max drawdown of only 1.73 per cent over the period.
This compares with a return of 41.81 per cent from the average UK Equity Income fund, which has been significantly more volatile with a max drawdown of over 5 per cent.
Performance of fund and sectors since June 2012
Source: FE Analytics
Henderson Multi Manager Diversified is also ahead of its sector over the period, with less volatility.
FE Research points out its fund of funds structure makes it particularly diversified, though accept that the fund’s yield of only 2.5 per cent is unlikely to be hugely attractive to income-hungry investors.
“The fund offers exposure to a wide range of funds that retail investors would not otherwise be able to access, such as private equity and hedge funds,” the team said.
“Specialist strategies such as these tend to behave differently to most of the major asset classes, meaning the fund offers an excellent method of adding diversification to a portfolio.”
McQuaker currently has around 6 per cent in property and 14 per cent in alternative strategies, including absolute return and hedge funds.
The cash weighting is currently at 18 per cent. The £93m fund has ongoing charges of 0.93 per cent.
Jupiter Merlin Income
For something a little more punchy in the yield department, the £4.6bn Jupiter Merlin Income portfolio is a possible option.
Yielding 3 per cent, the fund has delivered £500.46 in dividends from an initial £1,000 investment over the past decade.
This puts it only marginally behind the likes of the pure equity-focused Invesco Perpetual Income fund, though volatility has been significantly less.
Income-earned from £1,000 investment over 10yrs
Source: FE Analytics
FE data shows that the fund has returned 105.41 per cent over the last decade, falling less than 30 percentage points behind the FTSE All Share.
The fund has a higher risk-profile than the Henderson fund mentioned above, though this has allowed it to deliver a higher yield and more in the way of returns.
FE Alpha Manager John Chatfeild-Roberts and his team can hold up to 60 per cent in equities, while Henderson Multi-Manager Diversified can hold just 35 per cent at the very most.
The Merlin team currently have 40 per cent in equities, 31 per cent in fixed interest, 11 per cent in cash, and the rest in alternatives such as property.
The fund has been less volatile than equities, though with a max drawdown of 17 per cent over the past decade, it isn’t designed for investors with a low appetite for loss in the short-term.
Jupiter Merlin Income is expensive even for a fund of funds, charging 1.6 per cent.
“One downside to the fund-of-funds approach is the additional layer of charges, and the cost of the fund is high compared with many other mixed-asset portfolios,” said the FE Research team.
“However, the strong returns have more than made up for this. The fund is best used as a single investment solution rather than as part of a portfolio and this further justifies the high charges.”
Chatfeild-Roberts and his team tend to go for highly established funds and managers, including the likes of M&G Global Dividend, Artemis Income and Jupiter Strategic Bond in its top-10.
Premier Multi Asset Monthly Income
Richard Romer-Lee and his team at Square Mile rate David Hambidge’s £126m Premier Multi Asset Monthly Income fund very highly.
As well as having the advantage of paying income every month, the fund has been one of the best generators of dividends overall in recent years. An investment of £1,000 three years ago has resulted in dividends of £170 – more than the average UK Equity Income.
The fund, which is yielding just under 5 per cent, prioritises a strong and growing income above all else.
It has also managed to perform well from a total return point of view, thrashing its IMA Mixed Investment 20-60% sector over the past five years.
Performance of fund and sector over 5yrs
Source: FE Analytics
The fund has been slightly more volatile than its sector but is still significantly less so than equities.
It has a max drawdown of just over 6 per cent over five years. Romer-Lee says the only blemish on the fund’s track record was a poor financial crisis, which may make some investors focused on capital preservation think twice.
“We have a high regard for this experienced team. The team are familiar with the outcomes that private investors seek and this broadly constructed portfolio has historically generated a performance that has met the objectives set for the fund,” Square Mile said.
“The only real blemish to the performance record was caused by the 2008 financial crisis but we believe that the team have learnt valuable lessons from this experience.”
Premier Multi Asset Monthly Income is another fund of funds vehicle. It is invested predominantly in equities, bonds, cash and property, but also has some alternatives. Ongoing charges are 1.59 per cent, again making it expensive on a relative basis.
Willis points to the JPM Multi Asset Income fund as one that has performed very strongly in recent years. As well as significantly outperforming its IMA Mixed Investment 20-60% sector average since its launch in June 2009 with returns of 69.62 per cent, it has been significantly less volatile than its MSCI World benchmark.
The £308m fund has a healthy 3.7 per cent yield and has performed strongly from an income growth point of view.
Managers Michael Schoenhaut and Talib Sheikh are genuinely multi-asset in their focus, investing in equities, bonds, real estate, convertible bonds, preference shares and so on.
JPM Multi Asset Income has ongoing charges of 0.83 per cent, making it one of the cheaper options out there.
It has an unusual structure in that it draws on the ideas from managers running various portfolios at JPM, but rather than holding their portfolios like a fettered fund of funds, it invests directly in the same stocks and shares. This helps keeps the fees down.
FE Trustnet looked at the fund in more detail in an article last year.
