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Global multi-asset income funds: The ideal alternative to annuities?

14 February 2015

Schroder Global Multi-Asset Income is one of a number of funds that offers a more flexible alternative to annuities, which from April investors are no longer obliged to hold in retirement.

By Joshua Ausden,

Editor, FE Trustnet




George Osborne’s 2014 Budget has far-reaching consequences – not least in the fund management industry. Changes to the ISA allowance have given savers a big boost, but it’s the pension reforms that have really got the industry buzzing.

From April 2015, anyone aged 55 or above can realise their defined contribution pension pot however they want, subject to their marginal rate of income tax in that year. Previously many people with defined contribution savings were effectively compelled to purchase an annuity.  

This change means that anyone with an accumulated pension pot has much greater flexibility and control over making financial plans for their retirement.

The impending reforms have kicked many fund groups into action, which are looking to fill the void for investors who are unimpressed by the paltry yields available on annuities.

Unsurprisingly, income-paying multi-asset funds with a keen eye on capital protection have been at the focal point of the activity. These give investors access to a wide range of dividend-paying assets, helping to create a diversified income stream that investors in retirement can rely on. This ensures that the fund isn’t reliant on a specific area, lowering the risk of dividend cuts.

A diversified portfolio of different asset classes also gives a fund manager the best chance of protecting investors against the downside from a capital growth perspective – another key requirement for income investors.

Areas such as property, infrastructure, convertible shares and asset-backed securities have a low correlation to equities and bonds and indeed to each other, ensuring that investors aren’t overly exposed to one area. This helps to minimise volatility and downside losses.

Investing on a global basis arguably gives funds another layer of diversification.

Global multi-asset income is very popular in the US, but is relatively unknown in the UK. The pension reforms have ensured it should become much more available to investors in the future, however.

According to FE data, 10 multi-asset income funds in the IA unit trust and OEIC universe have been launched within the last 12 months. Among these is the Schroder Global Multi-Asset Income fund, which came to the UK market last December. It is an onshore version of a Luxembourg-domiciled fund launched back in 2012.

Rob Gleeson (pictured), head of FE Research, is a proponent of global multi-asset income funds and is pleased that fund groups are reacting to the pension reforms with new products.

While he believes these products aren’t a like-for-like alternative to annuities, he says these funds have a number of advantages for investors.

“Global multi-asset income funds are very viable solutions for income investors,” he said.

“It’s always good to get your dividend from as many sources as possible to ensure that your income stream is diversified and not reliant on any one asset class. It also helps to get exposure to asset classes that are relatively uncorrelated to equities and bonds from a capital growth point of view.”

“They can’t be seen as a like-for-like swap with annuities, however, as the income isn’t guaranteed. You’d hope the manager will be able to pay a regular and predictable level of income, but it’s not a 100 per cent certainty and investors need to remember that.”

“That said, investing in a global multi-asset income fund gives investors a better chance of generating capital growth and therefore a higher proportion of income in the future.”

It’s not only capital growth that sets global multi-asset income funds apart from annuities – there’s also the potential for a higher level of regular income, which can help to offset the rising cost of living.

This issue is particularly important at the moment. Annuities are linked to the interest rate available on UK government bonds, which are currently at record low levels.

Gleeson says it’s vital to get the right balance of income and downside protection, as high yielding sectors are susceptible to higher levels of volatility.

“It’s important to get the balance of risk and returns right. Managers with a proven ability of protecting against the downside and delivering stable and hopefully growing dividends should be in high demand,” added Gleeson.

Schroder Global Multi-Asset Income fund lead manager Aymeric Forest says that achieving a balance of income and capital growth is a key objective. He explains that he has a focus on quality assets to ensure that both capital growth and income are as secure as possible.

“Since we focus on quality as well as yield, we invest in high quality stocks and bonds where the yield is backed by stable fundamentals in order to provide a more sustainable income,” he said.

From a more practical point of view, buying such funds gives investors much more flexibility. Purchasing an annuity is a one-off, irreversible decision, whereas investors in funds have the freedom to change to an alternative product at any stage to reflect changes in their income needs.

Forest says that his fund is designed for investors approaching retirement and those who are already retired, who rely on a regular retirement income.

In the lead up to retirement, investors can hold the accumulation share class which targets a total return of 7 per cent per annum with significantly less volatility than equities. Investors can then switch into the distribution share class, which pays out a monthly income.

Schroder Global Multi-Asset Income has a target dividend yield between 4 and 6 per cent. The Luxembourg-domiciled version of the fund has returned 24.63 per cent since its launch in April 2012 (as at 23 January 2014) – an annualised return of 8.57 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.