The upcoming pension reforms will mean new freedom for investors. Multi-asset solutions, which aim to give exposure to a range of asset classes while limiting risk, could be the best solution for your pension. We ask the experts for their recommendations.
Guy Stephens, Jason Hollands
It is generally accepted that a blend of different asset classes helps enhance returns over time, because of the differing volatility levels of each asset.
This means that when equities – the most widely-held and volatile asset class – go through a difficult period, there are other assets in the portfolio that move in the opposite direction. These other assets – such as bonds or property – should also provide a reasonable return when equities are performing well.
Government bonds have historically provided this volatility-dampening feature, but the cost of holding them today is considerable, especially when we know interest rates will rise at some point.
This is why lower-risk alternatives, such as commercial property, infrastructure and some equity income strategies, have done so well over the last year.
The most well-known multi-asset fund is the Standard Life Global Absolute Return Strategies (GARS) fund, and various clones have been set up.
But we like the Invesco Perpetual Global Targeted Returns fund, and the Premier Defensive Growth fund. Both provide lower volatility and aim to match or beat the Libor rate.
This is particularly relevant to pension fund investing, as the investor wants a set return for no more risk than is necessary in perpetuity.
Choosing the best strategy will depend on the investor’s risk tolerance and overall objective.
The new pension regime is going to throw some historic investment strategies up in the air, as it will not necessarily be certain who the end investor will be.
For example, as the new rules allow a pension scheme to be used like a family trust and provide wealth for successive generations, the end investor of a pension scheme could be a person’s dependants.
KEEP IT CONVENTIONAL
It is quite important that the multi-asset fund is fairly conventional. I get very uncomfortable when there are a lot of unusual or creative strategies involving currencies and derivatives in the fund – which are impossible to explain to the average client.
Straightforward exposure to company shares, bonds and alternatives such as property, infrastructure and relatively ordinary absolute return strategies are preferable. Unconventional fund managers are often ploughing a furrow of being different, to stand out from the crowd. This can be very dangerous – as was seen in the credit crisis when liquidity disappeared.
The charges for multi-asset funds are also often higher, so the investor needs to be certain that any approach will provide added value.
Asset allocation – or how you divide your wealth up between different asset classes such as equities, bonds, commodities, property and cash – is key to successfully managing a portfolio.
Indeed, a number of academic studies over the years have demonstrated that asset allocation is a bigger driver of differences in performance between investment portfolios than stock or fund selection.
Not only does an approach which diversifies your exposure across multiple asset classes and markets expose you to a wider universe of opportunities, it should also reduce overall volatility by holding baskets of assets that are lowly correlated to each other at different points in time.
Managers of pension funds devote considerable time and resources to asset allocation, as do many hedge funds, with sophisticated tools in their kit boxes to help them.
Yet many private investors give little consideration to their overall asset allocation strategy. Instead, self-directed investors tend to choose investments in an ad hoc manner on the basis of whichever markets currently look attractive, or which funds have been performing particularly well at the time they have new cash to invest.
The trouble with this approach is that it can lead to a portfolio which is dangerously unbalanced, with the investor exposed to more risk than is necessary.
The emergence of multi-asset funds has made asset allocation-based strategies available to investors of all shapes and sizes, with many such funds providing access to around 20 underlying investments.
Attractive options include the Invesco Perpetual Global Targeted Returns fund, which invests in 25-30 individual strategies, across equities, bond and currency markets.
Its goal is to deliver a gross return of 5 per cent over three month UK interest rates, alongside low volatility.
MORE RISK, MORE REWARD
For those prepared to take a little more risk for potential reward, another contender is the Artemis Strategic Assets fund.
This fund has the flexibility to “go anywhere” across equities, bonds, cash, currencies and commodities, and it also has a more ambitious return target of beating the returns from both the FTSE All-Share index and cash, over a rolling three-year period.