“A key consideration for selecting a DGF for a DC plan is its diversification characteristics in relation to other return drivers in the glidepath and the risk/return profile relevant for the members in that phase of the lifecycle.
"We would argue that an actively managed multi-asset strategy targeting absolute returns could be increasingly beneficial towards the later stages of a DC lifecycle, especially if it can show low correlation with broad market returns and a higher potential for capital preservation.
"An absolute return multi asset strategy can also help calibrate the overall risk/return profile of the portfolio more precisely by starting in the growth phase and gradually increasing in allocation towards the end of the glidepath.”
Ms Felgate agrees that the requirements of the client change over time and, moreover, since the introduction of greater pension freedoms, the journey for many clients has changed course.
While the general strategy of taking on more risk earlier on before switching to a more defensive portfolio nearer to retirement still stands, the removal of the requirement to take out an annuity at age 65 and the decision by many to stay invested means the time horizon can increase by 25-30 years.
“People tend to approach that extended journey in a number of ways,” she explains. “On one hand, some people will be willing to take on more risk as they see that the horizon is longer.
However, for others, they remain very risk-averse and may want to increase the defensive characteristics of their portfolio. However, one thing to consider is, with the rate of cash so low, moving into cash in the 10 years leading up to retirement can have a negative impact on overall performance.
Equally, however, they may not want to take on excessive equity risk. In this instance, multi-asset can play a part in managing growth within a controlled risk framework.”
Indeed, looking at changing demographics and life expectancy, we can expect to see more people using multi-asset strategies in the future to continue with a growth objective because of the continued need for a return into later life.
Similarly, we can anticipate further development in the focus on income within multi-asset to help meet clients’ changing needs as the pensions horizon becomes less clear but, perhaps, richer with opportunities.
Laura Mossman is a freelance financial reporter
