March 2008

A safe haven

Prospective retirees looking for a safe place for their savings pot currently face a dilemma. On the one hand, the wild gyrations seen across stock markets in recent weeks have deterred many investors, as an examination of the latest IMA inflow report shows. On the other hand, while bonds and cash are the obvious choices for income seekers who don't want to risk their capital positive returns in the near future may be limited. Despite this, investors fleeing the turbulence in equity markets have sought the comparative safety of government bonds, with the result that yields have been driven down. To compound matters, many bond funds have attempted to spice up returns with corporate bond holdings, but these have also fallen foul of the credit crunch and have produced a negative return in the past few months.

Commercial property has been advisers' asset class of choice in recent years, but returns are now disappointing and liquidity issues have plagued open-ended funds.

Given all this, it is no surprise that investors have been seeking alternative solutions. At the moment the downside risk of investing in specific funds and asset classes is all too apparent so solutions which offer a more reasoned approach have great appeal. Multi-manager funds that combine different manager styles and maintain a focus on capital preservation will suit the needs of many.

Multi-manager funds have grown rapidly in popularity over the last decade. The ever-expanding universe of investment options and the difficulty of analysing and monitoring these choices has complicated the task of managing a personal investment portfolio. Multi-manager funds remove the complexity of selecting, monitoring and reviewing investment funds and simplify administration.

Fund of funds professionals have access to individual fund managers that may not be marketing themselves to the average retail investor. These investment management companies are able to pursue an investment style or approach unhindered by centralised asset allocation and investment processes. Particular fund managers may also have a specific culture or niche. Access to these types of funds, which are sometimes highly specialised in nature, can help further in ironing out volatility and promoting diversification.

They also have the experience, expertise and resources to focus entirely on researching the thousands of funds in the market place. They can invest across a range of asset classes, including equities, bonds, cash, commodities, property and hedge funds. By investing in a wide selection of assets, it is possible to take advantage of the low correlation that many of these asset classes have with each other. This helps smooth returns, reducing volatility and lessening the effects of the market's peaks and troughs.

Accumulated savings

This is very important in the context of retirement planning because clients have accumulated significant capital and don't want to take undue risks with their hard earned savings. They probably don't have the opportunity or desire to replace lost capital either.

For those already in retirement, there is also the issue of capital depreciation to contend with. Life expectancy is increasing at a faster rate than ever before, with the result that a person's retirement savings are having to support them for longer. Most people assume they will have enough savings to last them throughout retirement but this might not be the case.

The number of options open to those in retirement has increased rapidly in recent years, with pension drawdown products seeing a notable rise in popularity. These offer an individual more control over investment strategy and can be put into a self-invested personal pension (SIPP) as a way of spreading risk and achieving income,

If, for example, an investor is most concerned about capital preservation and opts for a cautious managed multi-manager fund, then the fund's manager can be relied on to make timely changes to the asset allocation in anticipation of opportunities and risk.

Multi-manager funds also offer a number of advantages to advisers. The growth in popularity of SIPPs and other pension products that offer investment control have significantly increased the number of funds that advisers may have to monitor and report on. By moving clients into appropriate multi-manager funds, monitoring and reporting again becomes viable.

Double charging

The so called 'double-charging' that investors face with multi-manager funds is sometimes used as an argument against them, as investors pay the initial charge of the fund itself and for the underlying funds. However, this ignores the fact that multi-managers rarely have to pay the same as an average retail investor. If an individual moves fund, he will have to pay the full initial charge every time. However, the discount available to multi-managers offsets this cost, particularly for a sizeable investment portfolio. In addition, the asset allocation and fund selection expertise provides further significant benefits and should more than offset these additional costs over the longer term.

Multi-manager funds can clearly have a significant part to play in peoples' retirement planning. A good quality fund will offer well diversified, professionally managed portfolios that are constantly reviewed. The broad diversification available via multi-manager funds means they are suited to those investors that require income, but don't want to see their capital disappear. Used as part of a diversified portfolio, they can help those planning for retirement face the dilemmas posed by today's challenging markets.

Bernard Henshall
Head of Multi-manager Distribution
Scottish Widows Investment Partnership (SWIP)