Disciplined diversification for decumulation

The advent of pensions' freedoms means there is a great deal more choice in how pensions are invested. While it's no longer a requirement to purchase an annuity upon retirement, little has changed in the ultimate goal: most pensioners are looking for a steady, monthly income that keeps pace with inflation and won't run out.

It helps to target a minimum income level, regardless of prevailing market conditions, without sacrificing the potential for some capital growth. This way, income sustainability can be achieved, with one eye on the potential preservation of capital over a much longer time horizon.

These new freedoms mean some are now opting to drawdown on their pension pot, rather than investing in an annuity. As they enter this decumulation phase, pensioners are faced with many choices and many challenges: average lifespans are increasing so the pension pot needs to last longer, while traditional sources of income are delivering extremely low returns. Decisions made at the start of retirement, when people are most likely to hold substantial amounts in their pension pots, will be key in determining both the level of income generated in retirement and the length of time it will last.

What's required at the start of this critical phase is an overall investment strategy that delivers relatively low volatility to reduce the chances of large short-term losses through diversification and investment flexibility within disciplined volatility parameters. In addition, it helps to target a minimum income level, regardless of prevailing market conditions, without sacrificing the potential for some capital growth. This way, income sustainability can be achieved, with one eye on the potential preservation of capital over a much longer time horizon.

Multi-asset solution

At Santander Asset Management, our Atlas Income Portfolio works on the premise that diversification is the key to delivering enhanced income yields. We believe the best way to achieve those yields over the longer term is by giving the Fund Manager Investment flexibility within controlled parameters. Combining an attractive income yield with capital growth and preservation potential, distributions are smoothed to help pensioners manage their finances and are paid monthly.

With income yields at ultra-lows and investors facing increased longevity and inflation risks, we believe it's paramount that pensioners are not unduly exposed to investment and liquidity risk through an overly concentrated approach.

"The Santander Atlas Income fund has an attractive yield target of 4% and the managers aim to generate this from a wide variety of sources whilst remaining within pre-defined volatility parameters," says Stewart Smith, Investment Research Manager at Rayner Spencer Mills Research (RSMR).

Rather than using a single risk profile, the Portfolio operates within specific volatility parameters, targeting a risk range of 3 to 5 (on our 1 to 10 scale). As the Fund is not shackled to a benchmark asset allocation strategy, the Fund Manager has the investment flexibility to deliver a good level of income, regardless of the prevailing market conditions.

Diversified approach

With income yields at ultra-lows and investors facing increased longevity and inflation risks, we believe it's paramount that pensioners are not unduly exposed to investment and liquidity risk through an overly concentrated approach. Rather than targeting income from just a few high-yielding asset classes, the Fund follows a diversified approach, using a wide range of asset classes and investment approaches.

For added peace of mind, we've also put in place investment limits on asset classes. For example, we limit exposure to property at 10% and alternatives at 20%. Fixed interest and cash falls in the range of 25-85%, while equity exposure is at 15-65%. We also enhance income through the limited use of call options, where we use the premium received from selling the options to enhance the natural income.

"The process is robust and disciplined and subject to rigorous monitoring and controls," says Stewart.

We also recognise that fees are vitally important during the decumulation stage in particular, and so, as always, we strive to minimise costs. The Fund has an ongoing charge figure (OCF) capped at 0.99% which includes an Annual Management Charge (AMC) of just 0.4% per year.

"In addition to the yield target and volatility parameters, the Fund is also managed to a strong cost discipline," adds Stewart.

"Overall, the Atlas Income fund is a strong option for income seekers also looking for an element of risk targeting from a multi-asset fund. We are delighted to add this to our suite of RSMR rated funds," says Stewart. Santander Atlas Income has a Recommended Rating from RSMR, and a 5 Diamond Rating from Defaqto.

Find out more

For further information please contact Simon Durling, Investment Product Specialist, quoting this article, on 07714 143205, email simon.durling@santanderam.co.uk or visit www.santanderassetmanagement.co.uk.

The Santander Atlas Income portfolio is a sub-fund of Santander Managed Investments OEIC (Open Ended Investment Company), a non-UCITS retail scheme, authorised by the FCA (UK).

Only for use by investment professionals. This does not constitute advice on the suitability of any investment. Opinions expressed are as of the date stated. The value of investments and income can fluctuate and is not guaranteed. Past performance is no guide to future performance. Investors should read risk warnings in the prospectus and relevant KIID.

Santander Asset Management UK Limited, registered in Scotland at 287 St Vincent Street, Glasgow G2 5NB, UK. Authorised and regulated by the FCA.