A multi-asset approach to retirement

In a Q&A, Jonathan Arthur explains why an investment style based on sound diversification can benefit pension holders

How can a multi-asset approach help a couple about to retire?

A truly diversified multi-asset portfolio of bonds, equities and alternatives can help mitigate sequence risk. This is because the assets in a well-diversified portfolio can respond differently to particular economic factors.

When people enter retirement, the investment risks they face change significantly. A couple that first starts to draw an income from their pensions is exposed to 'sequence risk'. So, if there is a significant market downturn at the time they begin to take a drawdown from their pension pots, then these market losses can become compounded. In other words, these initial market losses will have a negative knock-on effect on future pension returns.

A truly diversified multi-asset portfolio of bonds, equities and alternatives can help mitigate sequence risk. This is because the assets in a well-diversified portfolio can respond differently to particular economic factors. So, if some assets in a well-diversified portfolio are negatively affected by an economic event, others might be positively affected by it. As such, the probability of substantial declines occurring in a well-diversified portfolio would seem lower than in a poorly diversified portfolio.

We have recently seen government bonds performing positively at a time when equity markets have been weak. This highlights the continuing relevance of a mixed portfolio approach.

But the appropriate risk level of a multi-asset portfolio needs to be considered carefully. Taking too little risk can leave investors exposed to 'risk of ruin' towards the end of their retirement.

What multi-asset portfolios are available?

With most pensions required to deliver income for periods of more than 25 years, the compounding effect of costs and charges can have a real impact on investment values.

A key choice for multi-asset portfolios is between static and dynamic asset allocations. A dynamic asset allocation is typically updated every quarter to reflect the recent risk-and-return expectations for each asset class. In times of market stress, a fund with a dynamic approach may reduce exposure to riskier asset classes, such as emerging market equities. A static allocation remains rigid no matter what happens, for example 60% equities and 40% bonds.

Pension freedoms and defined benefit (DB) pension transfers have fuelled a boom in retirement solutions, particularly in multi-asset portfolios. With most pensions required to deliver income for periods of more than 25 years, the compounding effect of costs and charges can have a real impact on investment values.

Total annual fees or 'ongoing charges figures' (OCFs) typically range from 0.25% to 1.5%. Advisers must objectively analyse if the higher fees represent good value for money. The choice between using active or passive funds can also be key here, as passive funds generally have lower charges.

Some retirement solutions offer benefits such as guaranteed incomes and capital protection. These can seem attractive, but are really forms of insurance that don't always lead to the best client outcomes.

How do multi-asset portfolios create retirement income?

Jonathan has been a senior multi-asset product specialist for the past three years. He provides technical investment expertise globally for multi-asset, specialist income, real assets and alternative investment strategies.

Multi-asset products can be broadly split into two categories. The first, which often comes in the form of an income investment based largely on equities, distributes a yield-based annual income, such as 4% or 5%, for the entire retirement period. This income should match the annual spending requirements of the pensioner, while leaving the capital untouched. The second enables a sustainable drawdown from invested capital, such as 4% or 5%, for the entire retirement period, while ensuring the pension pot is not depleted before death.

There is an academic debate regarding the validity of each approach. Equity income investments were hit hard when the US Federal Reserve decided to raise interest rates, which sometimes translated into poor returns for these strategies. A multi-asset portfolio that enables a sustainable drawdown rather than a distributed yield can offer a more diversified approach.

For further market insight please visit www.adviserpointsofview.com

Jonathan has been a senior multi-asset product specialist for the past three years. He provides technical investment expertise globally for multi-asset, specialist income, real assets and alternative investment strategies.

For more information, call us on 020 7562 4900; Monday to Friday 9.00am – 5.00pm, calls may be recorded, or visit architas.com

This is for professional clients only and should not be distributed to, or relied upon by, retail clients. Past performance is not a guide to future performance. The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. The views expressed within this article are those of Architas, who may or may not have acted upon them.

Architas Multi-Manager Limited (AMML) is an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. AMML in the UK works with strategic partners and AXA Group internal fund managers, to find out more information about this please visit architas.com/inhousestratpartners/

AXA is a worldwide leader in financial protection and wealth management. In the UK, one of the AXA companies is Architas Multi‑Manager Limited, an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. Architas Multi‑Manager Limited is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm Reference Number 477328). The company is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD.