Could multi-asset funds be the ideal drawdown solution?

Despite the proposed pension changes, a rush to the nearest Lamborghini showroom looks unlikely for those in retirement. Alastair Mundy, Portfolio Manager Investec Cautious Managed Fund discusses how a multi-asset fund could well be the ideal destination.

It was headline grabbing and probably got petrol-heads over excited. From April next year, pensioners will be free to take their hard earned pension pots, nip down to their local Ferrari, Aston Martin or Lambourgini showroom and blow it all on the sports car of their dreams. This is according to Pensions minister Steve Webb and backed by Number 10. With the cheapest Lambourgini starting at a mere £164,000, this won’t be an option to many of course. It may have been a useful way of illustrating the government’s new pension freedoms, but the reason is simple.

A multi-asset fund could be an attractive solution in a world of volatile equities and where yield from fixed income is hard to find. Investors are eager to maintain their income flows, but this could mean that they are tempted into inappropriate, risky investments.

According to the ABI (Association of British Insurers) the average annuity in 2013 was bought with a pension pot of around £35,000, and the median was actually much lower at about £20,000 which is startling. Further, the median pensioner income after housing costs in 2011/12 was just £188 a week and around 60% of this came from the state pension and other benefits. I don’t think Lambourgini salesmen need get too excited.

Of course, people will realise that they’ll need income for many years after retirement and a new car, whether it’s a Ferrari or a Ford Focus isn’t an option. According to the ONS, Men in England and Wales are now expected to live for another 18.5 years, on average, past the age of 65; for women it’s another 21.1 years.

For some the security of an annuity could still be attractive, but many will want to take more control of their retirement. Indeed they’ll need their pensions to work harder. This will mean some sort of drawdown solution.

A multi-asset fund could be an attractive solution in a world of volatile equities and where yield from fixed income is hard to find. Investors are eager to maintain their income flows, but this could mean that they are tempted into inappropriate, risky investments.

At a time when investors are looking for stability of income, leaving pensions invested in a multi-asset fund could have distinct advantages. The periodic table of asset class returns over time is a familiar feature of multi-asset fund marketing materials. It demonstrates the steady, lower-volatility path historically navigated by this type of investment vehicle; an attractive feature for drawdown.

Cancelling units in order to pay for a specific level of income is fine when markets are performing well. However, if markets are falling, more units may have to be redeemed in order to maintain the desired income level. This constrains future growth and eats away at pension values. A multi-asset fund could cushion these harmful drawdowns whilst still providing an all-important growth engine.

A multi-asset fund with a proven track record and robust investment process seems like a sensible choice. Investec Cautious Managed Fund was launched more than 20 years ago and has proven itself through many major market events including the tech bubble and financial crisis. As the graph demonstrates, since launch 20 years ago, the Fund would have still significantly grown investors' wealth after £5000 annual income (taken monthly). Further, it would have still maintained investors' wealth after £7,500 was taken, in contrast to the average fund in the IMA Mixed investments 20-60% shares sector where wealth would have been depleted.

Investec Cautious Managed Fund graph

Past performance should not be taken as a guide to future returns. The value of investments can go down as well as up you could end up with less than you invested. Source: Investec Asset Management, Lipper, as at 31 December 2013, NAV based, income reinvested (inclusive of management fees but excluding any initial charge) net of UK basic rate tax, in GBP. Performance of Investec Cautious Managed A Acc Net. The chart does not reflect any applicable life company product or wrapper fees

The proposed changes to pensions should prove a game changer for the advice and fund management industry. As investors search around for a robust solution for their later life, multi-asset funds could be one the main beneficiaries.

For more information on the Investec Cautious Managed Fund, visit www.investecassetmanagement.com/cm

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Issued by Investec Asset Management Ltd, which is authorised and regulated by the Financial Conduct Authority, March 2014.