Hunting for treasure: Which fund managers are winning from pension freedoms?


Fears that retirees would blow their pension savings on new luxury lifestyles as a result of the overhaul of the UK’s retirement industry appear to have been overdone.

The introduction of the pension freedoms in April, which allow the over-55s to do as they see fit with their nest eggs, spurred concerns that many would blow the lot on prolonged holidays and fast cars.

Last year, following the announcement of the revamp, then-pensions minister Steve Webb now famously said: “If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.”

While a recent report showed that one man of pensionable age has spent no less than £1.3m on classic supercars, this particular petrol-head is very much the exception.

The latest numbers from the Association of British Insurers show that in the first three months since the reforms went live, some £2.3bn has been used by savers to buy almost 37,500 regular pension income products, while £2.4bn was withdrawn in cash lump sums or income drawdown payments.

The data from the trade body, which covers April, May and June, makes one thing very clear – pension savers want much more control of where there money is being invested.

The ABI numbers starkly highlight how the backdrop has already changed. Its statistics show that during the second quarter £990m was invested in annuities, marking a 44 per cent drop from the £1.8bn invested during the same period in 2014.

In sharp contrast £1.3bn has been invested in income drawdown products, representing a 70 per cent rise on the £767m sold between April and the end of June last year.

The reality it seems is that more people want to remain in the driver’s seat and stay invested into retirement as they draw income or capital from their pensions.

While assets under management in investment funds are likely to rise further, the loser as a result of the pension’s shake-up will be annuities – given the amount of cash already being diverted away from them and into funds.

As Chase de Vere certified financial planner Patrick Connolly says: “The old approach of people taking lots of investment risk when they are younger, reducing risk as retirement approaches, buying an annuity and then avoiding investment risk in retirement is already an outdated concept.”

Informed Choice managing director Martin Bamford agrees that investment vehicles generally should benefit from the new pension freedoms, as the market sees a shift away from buying annuities towards keeping funds invested throughout retirement.

He adds: “With longer life expectancy and low yields, investors will typically need more equity risk than they have taken historically in later life, so all fund sectors are likely to experience an influx. Funds with a focus on risk management and yield generation should do particularly well.”

New funds hitting the market

In the run up to and following the introduction of the Retail Distribution Review on 31 December 2012, a deluge of multi-asset type funds were launched in a bid to attract the so-called ‘financial orphans’ – those who were categorized as unlikely to pay for financial advice. The thinking was that these one-stop-shop-style portfolios could cater to the masses looking to grow their cash cheaply.

However the Chancellor’s radical announcement back in 2014 that retirees would be able to cash-in their pension gave this trend a fresh lease of life.

Fund providers have cottoned onto the fact that pension savers want to have a greater control over their retirement destiny. With savers now much more likely to squirrel away their pots into income drawdown portfolios, fund groups have been rolling out more specialist multi-asset vehicles targeting those looking to take advantage of their new found financial freedom.

While these portfolios all aim to grow saver’s pensions pre-retirement they invariably also have a big focus on delivering an income – the primary need of anyone who has finished work for good.

Since the start of the year to the end of September, more than 120 new funds have been launched, according to FE Analytics. While there have been equity income additions, almost half, at some 58 of these portfolios, have been placed in the Investment Association’s Unclassified sector, a known hub for multi-asset styled strategies.

“Multi-asset investment is really more an art than a science and as such you want someone at the helm who has been around the track a few times.”

Many of these funds unsurprisingly have a big income and capital preservation bias with most aiming to yield 4 per cent plus. For example, Newton rolled out its Paul Flood managed Multi Asset Income fund in February 2015, which it says aims to deliver “an unconstrained, actively invested fund, which aims to deliver sustainable monthly income and preserve capital for future generations”.

Architas swiftly followed up with its Diversified Global Income fund in March, which is co-managed by Architas CIO Caspar Rock. The firm described the portfolio as part of its “wider response to the pension changes”.

September witnessed Jupiter throw its hat into the ring with its Enhanced Distribution fund, which is looking to provide income and the prospect of capital growth over the long term, while October saw Rathbones introduce its Multi-Asset Strategic Income portfolio. Managed by group head of multi-asset investments David Coombs, it aims to deliver a minimum nominal gross yield of 3 per cent.

Surveying the trend of new launches looking to tap into the new retirement market, Rowley Turton chartered financial planner Scott Gallacher anticipates these types of funds will appeal to all investors. “I expect that they will become more of the norm moving forward,” he adds.

Hargreaves Lansdown senior analyst Laith Khalaf notes that in pretty much all cases, the portfolios tick a number of boxes, which should appeal to investors, namely that they offer “lower volatility than the market and an income focus”.

He says: “These are all new products and as such they do not yet have the track record to justify investment at the present time. Multi-asset investment is really more an art than a science and as such you want someone at the helm who has been around the track a few times.”

Of the new multi-asset kids on the block, Khalaf highlights the Rathbones offering. “Unlike many multi-asset funds, it is not stretching itself too far. It is not bogged down with a plethora of investment targets, it has been put together in a considered way.”

For the most part the consensus appears to be that simpler yield producing products including UK equity income and multi-asset income, are likely to win out under the new regime. In terms of the latter type, Khalaf believes the simpler funds in the mold of old style cautious and balanced managed funds are more likely to do better.

SG Wealth Management managing director Neil Shillito broadly agrees and expects to see a move toward perceived ‘safer’ assets. He says: “Having spent a lifetime saving for retirement and experiencing some severe shocks along the way, most pension investors will be seeking the next best thing to an annuity in terms of predictability of income.

“It is only natural for most people that having made it [they want to] hang on to it, so I doubt that only the brave will want to embrace anything more than a balanced portfolio and most will err on the cautious side of that.”

Khalaf points to the Rob Hepworth managed Eden Tree Higher Income fund, a constituent of the IA’s Mixed Investment 40-85% Shares sector, as one such fund he expects to potentially do well out of the reforms. He also rates the Mixed Investment 20-60% Shares listed Henderson Cautious Managed fund, which is co-managed by investment veteran Chris Burvell.

“People who were battening down the hatches and just trying to preserve capital waiting for annuity rates to rise, will now have the option to reinvest for potentially another 30 years.”

Notably almost two-thirds, at 65 per cent of institutional investors, believe that their peers’ exposure to multi-asset funds will increase over the next three years as the search for value and yield intensifies, according to research from NN Investment Partners.

Within its data the group also found that 45 per cent of investors believe that multi-asset strategies should be used as the core of a portfolio, while only 16 per cent view the asset class as an alternative allocation.

FE head of research Rob Gleeson believes the arrival of the pension freedoms simply means that it extends investors’ time horizons, so “people who were battening down the hatches and just trying to preserve capital waiting for annuity rates to rise, will now have the option to reinvest for potentially another 30 years”.

He says: “This will obviously mean more money in equities, at the expense of conservative asset classes such as gilts and absolute return but the funds popular pre-retirement will likely still be popular post retirement, as the type of portfolio will be quite similar.

“Equity income will remain popular, a big influx of pension money could push the sector even higher.”

Dash for yield

The dash for yield in the retail space over recent years has been well documented, given that emergency level interest rates have been with us for more than six years and counting. This economic backdrop has had a considerable impact for income seekers as savings rates and bond yields have plummeted considerably, which in turn has forced income seekers to take on more risk.

Numbers from the Investment Association paint a very clear picture of this current trend. More people than ever before are investing – funds now boast some £830bn in assets under management as of September this year.

Last year UK Equity Income funds were the top selling fund type among retail investors, after notching up sales of £6.3bn. Likewise income producing property funds enjoyed their best ever year with sales of £3.8bn. The popularity of both asset classes has endured well into 2015 too, as the latest numbers show UK Equity Income sector remains the top-selling sector with net retail sales £445m once again in September, while Property was in the top five with £196m. Tellingly, fixed income funds endured their highest outflow in net retail sales since June 2013 at £515m.

As a result of the income race, higher yielding investment trusts are trading at quite hefty share price premiums to their net asset valuations given the demand. For example, funds in the Property Direct UK category now carry an average premium of 5.1 per cent while Infrastructure is at a massive 10.2 per cent.

While there is some value to be had across the UK Equity Income closed-end space, with the sector on an average discount of -1.6 per cent, some of the more popular funds are trading at a premium, with the Mark Barnett run Edinburgh investment trust at 1.3 per cent and City of London at a marginally higher 1.4 per cent.

As the UK’s biggest fund supermarket, Hargreaves Lansdown offers a decent barometer in terms of investor behavior. The five most popular funds amongst its drawdown customers since April to end of September include – in no particular order – Marlborough Multi Cap Income, Newton Global Income, Hargreaves Lansdown’s own Multi-Manager Income & Growth Trust, Lindsell Train Global Equity and, what must be the most popular fund of the past year, the Neil Woodford run CF Woodford Equity Income, which since its June 2014 launch has witnessed its assets soar to almost £7bn.

Getting the mix right

All of the above points to further growth in the popularity of income fund and income drawdown strategies, the main alternative to purchasing an annuity at retirement. But getting the mix right can be a minefield. Multi-asset income funds will look attractive for investors who lack an adviser as many will want to take a hands off approach to investing but as Bamford cautions: “This can be dangerous when combined with income drawdown, as the investment strategy needs to be carefully tailored and monitored to keep pace with withdrawals.”

There are risks aplenty in the strategy. While benign market conditions will help grow the capital, severe volatility could see investors endure hefty losses – ultimately, the biggest danger is that an investor runs out of cash before they die. As such getting the asset allocation right is essential, after all somebody drawing pension benefits, assuming they are in good health, could conceivably live for 30 years or more post retirement age.

Getting the balance

Two experts put together sample income drawdown portfolios, one for income and another for income and growth. Both are comprised of what they believe are a winning combination of funds.


Chase de Vere’s Patrick Connolly has constructed the model income drawdown portfolio – focused on delivering on income, in this case some 4.08 per cent. The suite of funds is comprised of vehicles he has strong conviction in and he believes can help investors taking the plunge into post-retirement investing win-out.

Connolly says that while investors will need to hold equities to help their portfolio continue to grow, they need to be wary of taking too much risk, which is why other assets such as fixed interest and property should be held for diversification. Half of Connolly’s fund is therefore invested in shares, 35 per cent in bonds and 15 per cent in property.

He says: “In this portfolio I’ve focused equity exposure on equity income funds both in the UK and overseas. Threadneedle UK Equity Income is a fantastic and consistent core holding with a proven investment team, taking a long-term perspective and while focusing on larger companies, still adopting a contrarian approach.”

Connolly believes it compliments another holding, the Carl Stick run Rathbone Income portfolio, which is likely to have a bigger exposure to small and mid cap companies. Schroder Income Maximiser, is included “as an income booster”.

The global equity income exposure consists of Artemis Global Income, “which can be quite punchy and hold some stocks which others do not”, while Threadneedle Global Income is likely to take less risk and pay a consistent income, according to Connolly.

For fixed interest exposure he prefers the go-anywhere nature of strategic bond funds as he admits like many of his peers, he has “some concerns about the future performance of this asset class”.

He says: “The Henderson Strategic Bond and Jupiter Strategic Bond funds both tend to pay a competitive income, Henderson because of an ongoing exposure to high-yield bonds and Jupiter that looks for high yielding opportunities which other funds don’t always consider. I have countered this with the Kames Strategic Bond, which is more defensively positioned and paying a lower yield but the focus here is on capital preservation.”

Connolly notes that his firm has consistently held property funds in client portfolios. Here he has included M&G Property Portfolio and L&G UK Property.


Axa Wealth head of investing Adrian Lowcock has constructed a model portfolio, looking to deliver a combination of income and growth.

Protecting and growing the value of a portfolio in retirement can be just as important as getting an income from it. However, to get growth from a portfolio where the income is being withdrawn does require compromise. As such Lowcock’s portfolio has a lower overall yield of 2.69 per cent.

The fund has a punchy 70 per cent allocated to equities, with just 10 per cent in bonds, and 15 per cent and 5 per cent respectively in property and targeted absolute return.

When looking to generate a balanced portfolio Lowcock urges that it is important to ensure any income produced comes from a mix of different asset classes. He adds: “A well-diversified income stream is more stable, an important feature for retirees seeking income. Bonds provide a core stable income stream. This is complemented by equity income, which offers the ability for the income to grow over time with the aim of beating inflation.”

He looked to manage the risk by combining the income requirement with growth investments in areas such as Asian and emerging markets. While the ever-popular CF Woodford Equity Income fund is present in the fund, with a 15 per cent allocation, the Alastair Mundy run Investec UK Special Situations vehicle gets an equal showing.

Lowcock says: “Mundy is effectively a bargain hunter. His approach means he invests in areas of the markets others avoid providing investors with diversification and the potential to outperform in rising markets.”

Elsewhere the Don Jordison run Threadneedle UK Property Trust also makes up 15 per cent. “The focus is on property income as a key driver for investment returns with a flexible approach, selecting assets he thinks can add value and increase overall income through better management,” adds Lowcock.

The near-£25bn behemoth that is the Standard Life Global Absolute Return Strategies makes up 5 per cent of the fund’s assets and acts as both a cushion against market volatility and a diversifier. He says: “The team looks to exploit market inefficiencies by taking long and short positions in markets. The result is a highly diversified portfolio.”

Key Takeaway: A plethora of options are available to retirees shunning an annuity and staying invested. The number of fund launches this year in the multi-asset space highlights the managers hunting a slice of the assets. However, navigating the offerings is a minefield, with risks aplenty, and questions still remain as to how best to structure a portfolio for the decumulation stage.