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Investing for Drawdown: Three routes to multi-asset

Phased retirement and longer life expectancy have helped to shift the focus of retirement investing away from a specific event date towards a more rounded approach centred around sustainabilty. As a result, our research reveals advisers are laser-focused on their clients’ growth and income needs over a longer timeframe that is informed by cashflow requirements, risk tolerance, and capacity for loss.

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Insights from our adviser research

Advisers say their clients are looking for a balance of four things from their drawdown investment strategy – 1) an inflation-beating return consistent with their risk appetite; 2) some element of growth to fund their retirement; 3) the flexibility to draw a natural income; and 4) the ability to preserve capital and avoid the full extent of market setbacks that expose them to sequencing risks.
Based on these needs, it is little surprise that multi-asset funds, which invest in a variable mix of growth and income-generating assets, have become popular drawdown options with advisers. Our adviser interviews give an indication of how their drawdown conversations take structured routes, which can lead to multi asset recommendations for a range of risk-profiled client types.

“Drawdown is a complex advice area where peer-to-peer research is rare but valuable for advisers who want to compare their own methods with those of experienced practitioners. A balance must be struck for every client between the advantages of staying partly invested and the risk of running out of money due to poor investment performance or excessive withdrawals. A well-balanced approach is key and given their ability to provide a risk-defined range of likely outcomes, it is not surprising to see that risk-profiled, multi-asset funds are an essential part of the investment solution for many advisers.”

Heather Christie, Head of UK Adviser and Platform Sales, BlackRock

Three routes to multi asset

Advisers emphasised three key considerations for arriving at a suitable drawdown investing strategy in their client conversations.

1. Reassess your client’s risk profile in the context of their cashflow needs in real terms:  This lays the foundation for building a mutually-agreed solution that is more likely to meet their expectations, while building client resilience to market wobbles.

This risk profiling and cashflow analysis will naturally funnel many clients into a volatility-managed, multi-asset solution that offers a mix of growth and income assets based on their risk level. For larger, risk averse clients, advisers tell us they may use a discretionary model portfolio approach, but for the broad swathe of clients in the middle risk ranges, advisers will typically use a combination of multi asset funds.

2. Address the issue of sequencing risk upfront: The differential impact of taking withdrawals in a rising or a falling market can be significant, while an ill-timed market correction could leave a fund depleted without the time (or investment mix) to recover those losses.

Advisers address this risk with clients upfront by presenting worst case scenarios. A volatility managed, multi asset fund can avoid the full impact of market corrections thanks to a risk-defined level of exposure to defensive assets, while retaining a risk-defined exposure to growth to fund longer lives. Active multi asset funds with a tactical asset allocation overlay also have the capacity to respond to falling markets or tough economic conditions. Some advisers like to combine passive and active Multi Asset funds for this reason, to provide an overall solution that is both flexible and cost-aware.

3. Don’t over-complicate the strategy: The investment strategy for most clients should be low-cost, flexible enough to respond to market conditions, and capable of providing an attractive return over time without putting too much value at risk. Most (but not all) of our advisers were leery of taking on the investment manager function. By outsourcing the management to those resourced to do 24/7 research on markets and assets, they felt they could leave investing to the experts and avoid the resource-intensive operational challenges and regulatory scrutiny that comes with advisory management. While certain advisers use bespoke DFM portfolios for larger pots, other advisers are wary of the higher fees and lack of transparency that makes performance comparisons challenging.

Multi-asset funds can offer attractive capital and income returns for various levels of risk, at a lower cost than bespoke portfolios. Critically for some of our advisers, multi-asset funds can also be combined to reduce institutional bias, blend styles and optimise cost. This enables advisers to effect a more fundamental outsourcing of the investment function that delivers a cost-effective and risk-defined solution for many of their clients.

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