Income is the key word in the UK market at the moment. The pension freedoms meaning people can take their entire pension pot and keep it invested through retirement rather than buying an annuity has meant big changes in the asset management industry. Asset managers have been rushing to advertise their income funds as the ideal solution for those wanting to maintain capital through retirement, while multi-asset funds are being touted as the ideal way to ensure diversity on the money left invested.
Justin Christofel, manager of the BlackRock Global Multi-Asset Income fund, is aware he is entering a crowded market where managers are vying for attention, but he thinks the fund can stand out from its peers.
The fund uses a multi-asset approach to target income of between 4 and 6 per cent, while taking low to moderate risk. To date it has achieved income of 5.5 per cent, which Christofel is happy with considering the yield environment at the moment.
BlackRock started the US version of the fund in November 2011. It then launched the UK version in January this year, converting the existing BlackRock Balanced Income portfolio fund into the new global multi-asset income fund.
“It was timely for UK clients considering the pension reforms,” Christofel says, as these investors are looking for income with the capital growth being such that they preserve their purchasing power, he believes.
While, clearly, Christofel doesn’t think the fund is a one-stop shop for UK retirees keeping their money invested, he thinks it can work alongside an annuity and other funds.
His expectation is that baseline expenses should be covered by an annuity, with the rest being invested with income as the goal. “Income will become a core part of the retirement portfolio,” he says, envisaging that retirees will have one pot for growth, one pot for capital preservation, and “then an income bucket sitting in between”.
However, in the US the fund has been often used purely for growth, with two-thirds of investors reinvesting the dividends, he says.
Prior to the UK launch the fund had a clear US bias, as many US-run funds tend to, but Christofel has since worked to broaden this out and spread its geographic focus beyond US shores.
“We had been more comfortable in US assets, but in mid-2014 we increased our confidence in Europe and the rest of the world,” he says, although admits there hasn’t been a dramatic increase in the non-US allocation.
North America still accounts for 41 per cent of the portfolio by regional exposure, compared to 21 per cent in Europe and 7 per cent in the UK. “We are trying to get a balance between US and non-US,” Christofel adds.
Ultimately asset allocation decisions are made on a risk basis, says Christofel. Rather than have preferred asset buckets, the managers take a “risk-first approach,” he says. For this reason the fund doesn’t have a benchmark, instead just targeting an income level.
“We take exposure where we get appropriate compensation, and if that means we take less income then we are ok with that,” he says. “While we need income we don’t want a lot of volatility, we pay particular attention to downside risk, which means that relative to other multi-asset funds we are quite conservative.”
One factor that plays into this hunt for income is the use of a covered call strategy, which aims to dampen volatility while still giving upside potential.
The use of covered call strategies is more prevalent in the US, with a handful of UK equity funds adopting the approach. It essentially involves taking a long position in a stock at the same time as selling a call option on that stock. The strategy means that a manager loses out on extreme spikes in the equity’s price, but also makes money on the call writing to protect on the downside.
It is this strategy that helps the fund to stand out from its peers, says Christofel. “Covered calls are very popular in closed-end structure, but having an allocation as large as ours in a [retail fund] is pretty unique in its space,” he says.
The strategy makes up 18 per cent of the fund’s allocation, but accounts for around 40 per cent of the total portfolio income, says Christofel, making it a strategy that’s set to stay.
This generation of income also means Christofel doesn’t get pigeon-holed into the typical equity income stocks many managers flock to. Concerns have been raised in the market that too much concentration occurs among equity income managers, who invest in the few decent dividend-paying companies. The covered call strategy allows Christofel to step away from the herd, he says.
“Because we’re generating income in the covered calls we can be more cautious in other areas where the risk-return profile is not what it needs to be,” he says.
The fund has moved away from the credit space recently, with fixed income making up 38 per cent of the portfolio now, compared to a 40 per cent allocation to equities and the remainder in covered calls or cash.
“We have reduced our allocation to credit, particularly in US high yield, we have gone up in quality and shorter on duration,” he says. This means the fund is yielding lower than the index, but it doesn’t concern Christofel.
Christofel started with BlackRock in 2007, having come from Oliver Wyman, a consulting firm that specialises in financial services. He started as an analyst on the multi-asset team, working his way up to be a manager in the group. He manages the fund alongside Michael Fredericks and Alex Shingler.
However, the UK fund is still small, overshadowed by its US counterpart. The US fund has amassed $11.2bn, while there is £73m in the UK version of the fund.
But Christofel is focused on growing this, using old-fashioned adviser meetings, roadshows and one-on-one conversations to spread the word. “[The fund] requires more conversation and discussion, as it does not fit into one box. We help advisers to understand the value proposition and how it compliments other strategies they have.”
2006: Christofel starts his career at Oliver Wyman, a consulting firm specializing in financial services.
2007: Christofel joins BlackRock as an analyst in the multi-asset team
2011: Christofel becomes a manager in the multi-asset team
2015: Launch of the UK version of the global multi-asset income fund