Bernard Henshall discusses the role multi manager investment strategies can play in retirement planning
As the repeated failures of would-be stockmarket seers have shown, making predictions about the future is a dangerous game. There is, however, one prediction that we can make with absolute certainty: 2011 will represent a landmark year for the retirement systems of much of the developed world.
Happily, we don’t need a crystal ball or a set of tarot cards to make that deduction – it’s simply a matter of demographics. In demographic terms, the significance of 2011 is hard to overstate. Across the West, the next 12 months will see the first members of the baby boomer generation, that massive cohort born between 1 January 1946 and 31 December 1964, cashing their retirement cheques.
The boomers’ shift out of work and into retirement poses a number of difficult questions, not just for the retirees themselves, but for governments and financial markets around the world.
Finding a way to fund the retirement of this large and politically influential group also represents a new challenge for retirement planning. At SWIP, we believe that multi-manager funds will have a vital part to play in meeting that challenge.
Better diets and healthcare mean that life expectancy is increasing at a faster rate than ever before, with the result that a person’s retirement savings must support them for longer. Given current life expectancies, a British male retiring at age 65 has, on average, 17.5 years of retirement of which to look forward to. At 65, a British woman can reasonably expect to be drawing a pension for another 20 years.
This represents a relatively long investment horizon and explains why many pensioners still want their assets to carry on working, even when they no longer have to. Increasing life expectancies, coupled with declining state provision, are making an element of growth a necessity.
Increasing longevity means that many retirees no longer want to convert all of their assets to buy an annuity. An individual’s retirement date may unfortunately coincide with a market downturn. Buying an annuity at this point would mean crystalising large losses at the bottom of the market.
Instead, a growing number of them are realising that they need a portfolio that provides ongoing capital growth after retirement in addition to an income. This is where multi-manager funds can help. By combining different manager styles to produce growth, income and preserve capital, a well-run multi-manager fund can help retirees meet the challenges of retirement provision in this new era.
The advantages of multi-manager investing
We believe multi-manager funds have a number of advantages over more traditional, ‘single strategy’ approaches to retirement provision:
- Annuities are inflexible – and timing when to buy an annuity in volatile markets can be challenging.
- Equities can be too volatile.
- Given current yields, bonds may not generate the returns that many retirees are looking for – particularly given resurgent inflation.
- Given the precarious fiscal situation of many Western governments, it might be argued that bonds don’t represent the failsafe option they used to.
- Property is an illiquid asset with high transaction costs.
Given these drawbacks, we believe the most appropriate response is to build a broadly based portfolio. Multi-manager funds typically invest across a range of asset classes, including equities, bonds, cash, commodities, property and hedge funds. By investing in a wide selection of assets, a multi-manager can take advantage of the low correlation that many of these asset classes have with each other. This helps smooth returns and reduce volatility.
The benefits of simplicity
It is the ability of multi-manager funds to use diversification to meet the challenges facing retirees that explains their rapid growth in popularity over the last decade. There is, however, another reason for looking to multi-manager funds: they help restore simplicity to an increasingly complex world.
The universe of investment funds is continually expanding. Analysing and monitoring the thousands of funds available has complicated the task of managing a personal investment portfolio. But multi-managers have the experience, expertise and resources to focus on researching funds across the market. By assigning the responsibility for selecting, monitoring and reviewing investment funds, multi-manager funds allow investors to focus on bigger decisions, such as how much risk to take or how much income to draw down.
So, multi-manager funds clearly have an increasingly significant role to play in retirement provision. A good quality fund will offer a well-diversified, professionally managed portfolio under constant review. The broad diversification that multi-manager funds offer means they are suited to those investors that require an income, but who don’t want to see their capital disappear. That seems likely to describe a growing number of retirees – in 2011 and beyond.
Bernard Henshall is head of multi-manager distribution at Scottish Widows Investment Partnership
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