A bottom-up redesign of the Old Mutual Generation funds means that the portfolios are genuinely aimed to be in-line with the needs of retired investors, according to manager Anthony Gillham, who argues that the funds industry has so far failed to look after this type of client to an adequate degree. 
Old Mutual Global Investors (OMGI) launched refreshed versions of three funds in the range in October 2015 after Gillham (pictured), co-investment director of Old Mutual Global Investors’ multi-asset unit, and Old Mutual Cirilium manager Paul Craig took over the portfolios from John Ventre.
This came at the same time as the removal of the funds’ explicit income targets, although they still target capital growth and income generation. The products were renamed as Old Mutual Generation Target 3, Old Mutual Generation Target 4 and Old Mutual Generation Target 5 in reflection of this.
However, the biggest change came to how the portfolios are constructed as the new managers designed a range that they believe is more appropriate for the in-retirement market than the current offerings from the industry – chiefly through obtaining the right balance between capital growth and capital preservation.
Gillham says the new approach of the Generation funds means they are “truly differentiated” from what other asset management houses are doing.
“The Old Mutual Generation funds really have been designed from the ground up with a completely blank sheet of paper to meet what we believe are the unique and very specific needs of the in-retirement market,” he said.
“As an industry, we're very used to helping clients save for their retirement – so to accumulate wealth – but where the funds industry is perhaps a little bit behind the curve is on how to address the specific issues that clients come to face in retirement.”
One failing of the industry, according to the manager, is to design products that either focus on capital growth or capital preservation rather than attempting to achieve the right balance of the two.
He says that most funds do one of these “polar opposites” and either chase growth but put their investors at risk of large drawdowns or seek to protect capital but fail to capture much of the upside. What few managers do is attempt to get the right mix of styles that the investor needs for a comfortable retirement.
“Why have we identified this retirement segment as needing something a little bit different from other funds? Why should a decumulation investment strategy be different to an accumulation strategy? We spent quite a lot of time looking at different customer needs and when I looked across what the existing space looked like, what I noticed was that most funds tend to get the balance wrong between trying to provide growth and defence on the downside,” Gillham said.
“On the growth side, an in-retirement portfolio still needs to have a good smattering of growth assets to preserve the purchasing power of your retirement savings. Whilst we retire at 60 or 65 with potentially quite a large pot, the purchasing power of that is going to fall over time because of inflation. You don't need a PhD in maths to realise that, just as compound interest helps you when you're saving for retirement, the opposite is true in retirement when it comes to inflation.”
“It's also quite easy to explain why you need to defend on the downside, especially in retirement. When you're saving for retirement, while it might not feel like it at the time a drawdown can actually be helpful to your investment strategy as it allows you to buy more financial assets at a cheaper price.”
“For a retired investor, however, that benefit is flipped on its head because when you're decumulating you have the opposite problem - you're taking money out of the market at a lower price. The need to protect capital is therefore quite high in retirement, otherwise we'd be forcing clients to sell low and creating the risk of them running out of money.”
Achieving the right balance between these two factors is critical to how the Generation portfolios are built. The manager says that all elements of the funds’ portfolio construction – such as asset allocation, fund selection and the use of new powers to own direct securities - comes down to achieving this balance.
“I can’t stress how important that is to us,” Gillham said.
Given the intense focus on providing an appropriate solution for retired investors, it may surprise some that the funds have removed their explicit income target. Old Mutual Generation Target 3 and Old Mutual Generation Target 4 both previously aimed for a 4 per cent yield.
However, Gillham says that imposing a yield target means that the two main goals of capital growth and downside protection would have to be compromised. Rather than risk these aims, the manager would rather avoid adhering to a strict income target.
“When you shoot for an income target, you bias yourself towards income-producing strategies which don't necessarily get right the balance we're looking for. You almost get an illusion of slow and steady income when the reality is you don't have as much downside defence as you might at first think,” he said.
“Even in the context of income-providing assets – particularly when it comes to high yielding shares – you still have a high potential for some sharp drawdowns. Just because a company has a high yield doesn't mean it's immune from big falls in its share price and we've seen that on a number of occasions - just as with commodities recently and the banking sector in 2008.”
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This communication provides information relating to a fund known as the Old Mutual Generation Fund (the “Fund”). This communication is issued by Old Mutual Global Investors (UK) Limited (trading name Old Mutual Global Investors), a member of the Old Mutual Group. Old Mutual Global Investors is registered in England and Wales under number 02949554 and its registered office is 2 Lambeth Hill London EC4P 4WR. Old Mutual Global Investors is authorised and regulated by the Financial Conduct Authority (“FCA”) with FCA register number 171847 and is owned by Old Mutual Plc, a public limited company limited by shares, incorporated in England and Wales under registered number 3591 559.
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OMGI 01/16/0400