Bernard Henshall takes a look at how the multi manager approach can benefit investors
A common assumption for investors facing retirement is the need to reduce risk within their pension funds and consolidate previous gains. A client that has saved for many years and has a lot to lose is unlikely to start dabbling in emerging markets, equities or high-risk junk bonds for example.
The de-risking of portfolios is certainly sensible for those in company schemes or that don’t want to actively manage their investments. But this perceived wisdom that impending retirees will suddenly convert all their investments to cash isn’t being universally adopted. In reality, clients have a number of assets that they need to build into their retirement plans. These can include a variety of ISAs, savings vehicles, legacies from inheritances or residential property, which they use to unlock value by trading down.
Given current life expectancies, a male retiring at 65 has, on average another 17.5 years to look forward to, while females can reasonably expect at least another 20. This still represents a relatively long investment horizon and explains why many pensioners still want their assets to carry on working, even when they don’t have to.
It’s also important to recognise that retirement planning isn’t done in isolation from global events. An individual’s retirement date may unfortunately coincide with a market downturn.
This would mean crystallising large losses at the bottom of the market. If a turnaround is just around the corner, selling out at this point is clearly a bad idea.
As a result, many retirees are realising that what they require is actually a portfolio that provides both growth and income as part of an integrated financial plan. This is where multi-manager funds can help provide a solution. Investments that combine different manager styles and maintain a focus on capital preservation will suit the needs of many.
A complex task
Multi-manager funds have grown rapidly in popularity over the last decade. The ever-expanding universe of investment options and the difficulty of analysing and monitoring these choices has complicated the task of managing a personal investment portfolio. Multi-manager funds remove the complexity of selecting, monitoring and reviewing investment funds and simplify administration and remove risk from the investment process.
Multi-managers also have the experience, expertise and resources to focus entirely on researching the thousands of funds in the market place. They can invest across a range of asset classes, including equities, bonds, cash, commodities, property and hedge funds. By investing in a wide selection of assets, it is possible to take advantage of the low correlation that many of these asset classes have with each other. This helps smooth returns, reducing volatility and lessening the effects of the market’s peaks and troughs.
This is very important in the context of retirement planning because clients have accumulated significant capital and don’t want to take undue risks with their hard earned savings. They probably don’t have the opportunity or desire to replace lost capital either.
For those already in retirement, there is also the issue of capital depreciation to contend with. Life expectancy is increasing at a faster rate than ever before, with the result that a person’s retirement savings are having to support them for longer. Most people assume they will have enough savings to last them to see them through retirement. However, this might not be the case. Increasing life expectancies are making an element of growth a requirement for investors’ savings pots.
The number of options open to those in retirement has increased rapidly in recent years, with pension drawdown products seeing a notable rise in popularity. These offer an individual more control over investment strategy and can be put into a self-invested personal pension (SIPP) as a way of spreading risk and generating income. If, for example, an investor is most concerned about capital preservation and opts for a cautious managed multi-manager fund, then the fund’s manager can be relied on to make timely changes to the asset allocation in anticipation of opportunities and risk.
Multi-manager funds clearly have a significant part to play. A good quality fund will offer well diversified, professionally managed portfolios that are constantly reviewed. The broad diversification available via multi-manager funds means they are suited to those investors that require income, but don’t want to see their capital disappear. The most effective way to build a sustainable portfolio is via diversification and professional management.
Bernard Henshall is head of multi manager distribution at Scottish Widows Investment Partnership (SWIP)
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