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How fund managers deliver retirement income in a storm

Talya Misiri speaks to a quartet of portfolio heads who say their funds can offer drawdown investors absolute returns irrespective of market turmoil.

How fund managers deliver retirement income in a storm

With short-term fretting about Brexit, long-term worries about the US economy, central bank policy changes and other global political issues, the current macro-economic climate appears to lack stability for cautious and income-dependent investors.

IFAs have more than one way to generate income from a portfolio, but for clients in drawdown stability is often a priority. Market uncertainty and the low interest environment has made it a challenge for investors seeking continual payments.

At the New Model Adviser® Retreat a number of fund managers could be found aiming to provide sustained income for investors.

Durable portfolios

Absolute return funds were championed for generating income both in times of market prosperity and when facing challenging periods.

Discussing the Jupiter Merlin absolute return portfolio, Citywire A-rated fund manager Algy Smith-Maxwell (pictured above) explained having a range of uncorrelated funds and managers is key to the successful performance of the portfolio.

‘Correlation between certain managers is high, but there is also diversification. What’s more important is that there are low correlations, sometimes negative correlations, between the long-only managers and the long-short managers. That gives me comfort that I’ve got an eclectic mix of strategies doing different things at different times,’ he said.

Ultimately, the composition of the absolute return strategy can provide advisers and investors with the knowledge that market turns will not always mean income losses. ‘This portfolio should get cautious investors through difficult times,’ Smith-Maxwell said.

Zeroing in

Invesco Perpetual multi-asset fund manager Georgina Taylor (pictured above) said her fund targets absolute returns for investors.

The Invesco Perpetual Global Targeted Income fund has asset class exposure ‘across the board’, she said, adding that ‘what that then gives you is more opportunities to get income from the fund’.

Taylor noted the fund also has assets that ‘generate zero income’, which is necessary to offset unexpected high interest rates and higher rate investments. ‘You’ve got to have other stuff that kicks in and helps you and sometimes that’s the lower income stuff.’ The fund is only one year old.

Similarly, governed portfolios were proposed as a reliable strategy to deliver income for investors amid political and economic uncertainty.

In a session on multi-asset funds, Royal London head of multi-asset Trevor Greetham said this type of fund has ‘been through recessions’ – meaning managers know how they will respond if the market were to be hit the same way again.

Similar to the absolute return strategies, Greetham noted some holdings in the portfolio either ‘follow the strength of the pound or counters it if it falls.’

To deliver sustained income, Greetham said, the fund looks to ‘hedge rather than being heroic’.

At full stretch

Value funds were also pitched as a strong option for investors at present. It’s a ‘great time to be considering value as an [investment] style’, said Daniel White (pictured above), Citywire A-rated manager of the M&G North American Value fund.

Speaking at the retreat, he set out his argument why his fund, which has returned 76% over three years and has a risk-adjusted rank of 62/244 in the Equity - US sector, was well placed for the current climate. He pointed to the recent underperformance of bond proxies affected by market changes; the risk that the top five best performing stocks, all US tech stocks, would be simultaneously disrupted; and the ‘distorting impact’ of smart beta exchange-traded funds on parts of the market.

White also highlighted an argument for value investing. ‘The valuation discount between cheapest and most expensive stocks has never been wider than it is today,’ White said. ‘Similar to a rubber band, it can only stretch it so far. The further you stretch it, the more inevitable a snap back of some description. This is the real catalyst for value outperforming.’

Nonetheless, he accepted the needed avoid value traps, companies that are cheap yet not environmentally or socially sustainable. Instead he incorporates a consideration of ethical, sustainability and governance factors when selecting stocks.

While value funds can be volatile with market fluctuations, White argued, the M&G fund has shown consistent performance ‘at a time where value as a style has been out of favour’. The fund’s process has been able to ‘offset headwinds’ and still deliver returns where the style has not shown the best performance, White said.

While it is up to advisers to evaluate what strategies and funds are best for their clients, the sessions highlighted that, during periods of uncertainty, a degree of hedging is increasingly valuable. To deliver a continual income for drawdown investors, portfolios must be prepared both for periods of market growth and more challenging conditions.

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Georgina Taylor
Georgina Taylor
34/74 in Mixed Assets - Absolute Return GBP (Performance over 3 months) Average Total Return: 3.42%
Trevor Greetham
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39/129 in Mixed Assets - Aggressive GBP (Performance over 3 years) Average Total Return: 27.54%
Algy Smith-Maxwell
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35/129 in Mixed Assets - Aggressive GBP (Performance over 3 years) Average Total Return: 28.24%
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139/234 in Equity - US (Performance over 3 years) Average Total Return: 47.0%
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