Are Multi-Asset Funds Right for Retirement?

Multi-asset funds have grown in popularity among advisers as people are retiring earlier and living longer. These products are getting cheaper too

Grace Oliver 7 June, 2021 | 12:54AM
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Over the past few years, multi-asset funds have seen a resurgence and particularly among investors who are retirement planning. Often touted as a one-stop shop for investors, multi-asset funds are a good option for those looking for a more hands-off investment experience. Multi-asset funds can, as the name suggests, invest in different types of asset, meaning the fund manager makes asset allocation decisions on your behalf, usually according to a certain risk profile.

According to recent research from Aegon, more than 56% of advisers either “always” or “often” recommend multi-asset funds for their retirement clients. The research also shows that more than one-in-five advisers plan to increase their use of multi-asset or multi-manager funds over the next three years, compared with just 5% who expect to decrease use “slightly”.

This move to multi-asset or multi-manager funds reflects some of the challenges that advisers and investors alike face in running and monitoring the more complex models such as in-house risk-rated model portfolios and bespoke portfolios which, since January 2020 have seen use decrease by 9% and 17% respectively, according to Aegon’s research.

Multiple Benefits

Over the past 50 years, the UK’s average life expectancy has increased by a decade to just over 81 years old, meaning people are not only living longer, but will be in retirement for longer.

David Coombs, head of multi-asset investments at Rathbone Investment Management, says that as people are retiring earlier and living longer, the key need for a multi-asset product is to preserve value.

Investment expert Adrian Lowcock says: “Multi-asset funds in retirement are still evolving and the reality is that clients might need a number [of funds] to meet the combination of income and capital growth. The best solutions are the fund groups that offer a wide choice across all the risk spectrums as well as the ability to choose from active, passive or a mix of the two.”

Cormac Nevin, fund manager at Beaufort Investment, believes there are multiple benefits to multi-asset funds including less time “out of the market” for investors, the limiting of any capital gains tax events that might be triggered when managing your own portfolio, and the nimbleness that comes from having a full team of analysts doing the research and trading on your behalf.

He points to last year’s pandemic-induced sell-off as one example of where multi-asset funds can be a valuable part of a portfolio, as the manager can change the make-up of the fund to adapt to the market, rather than being tied to a particular region or type of asset such as stocks or bonds.

But Darius McDermott, managing director at Chelsea Financial Services, think multi-asset funds have a different appeal: income. He says: “People in retirement tend to like a premium yield that is paid regularly, so multi-asset income funds with a high yield are popular. Funds in the Mixed 20-60% Shares Investment Association sector (similar to the Morningstar Flexible Allocation or Moderate Allocation categories) in particular are appealing as they can offer a bit of capital growth too, which is helpful as no one really knows how long they are going to be retired for.”

What about Bespoke Options?

Bespoke portfolios are undoubtedly more expensive, often available only to investment professionals or high net worth individuals. For retail investors, low-cost funds are typically more attractive.

McDermott says: “The variety of multi-asset funds on offer today, and the fact that they can invest in so many different things makes them a simple and cheaper way of investing for retirement these days.”

While Coombs is a multi-asset fund manager, he admits there is still a place for bespoke portfolios though: “I think they are still very important in retirement for those families with very complex cashflow needs, or taxation issues, and multiple layers of family. It can still be appropriate. But for mainstream investors, the lower cost of a multi-asset fund and the simplicity is probably attractive.”

A One-Stop Shop

Lowcock adds: “Multi asset funds are an easy one-stop solution for investors. Most of the time there is a range of funds from the same provider that covers the risk spectrum. The fund managers spend a lot of time focusing on risk management and keeping costs low.”

Coombs adds that a bespoke portfolio is not as transparent as an open-ended fund – something which is a key issue for many investors. He says: “If a fund underperforms you can blame the fund manager, but if it’s bespoke and [the adviser or investment manager is] more involved into the day-to-day strategy it’s harder to blame the manager. Which is perhaps quite a cynical way of looking at it.”

As the retired population increases, more people are entering drawdown and staying invested even after they stop working; it's the only way to be confident they won't outlive their savings. That means it's vital to have a product that will stay with you through different phases of retirement where your needs can vary significantly, so it is clear why investors opt for stability and low cost.

Coombs adds: “We can get so lost in the benchmarks or looking at MSCI but when you strip it back, what investors should be looking to do, whether it is through income or capital growth, bespoke or multi-asset, is to preserve the value of their capital.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Grace Oliver  Grace Oliver is a freelance financial journalist