09 June 2015

A multi-asset approach to investing

A multi-asset approach to investing

The Defined Contributions (DC) pension industry is growing and changing rapidly. With auto-enrolment, the recent pension reforms and introduction of the charge cap, many are left asking - what should a well-designed default investment option look like?

We understand that for many, selecting an appropriate investment solution that balances return requirements against the level of risk you're willing to take, whether during accumulation or decumulation phases, can be challenging. We therefore believe that a multi-asset approach could be the answer that many are looking for.

Why multi-asset funds in the default solutions?

Diversification spreads out investment exposures and can reduce the chance of volatility outcomes. As such, it's often called one of the few 'free lunches' in investments; an opportunity to reduce risk without impacting the expected return.

Multi-asset funds such as Legal & General Investment Management's (LGIM) Multi-Asset Fund and Retirement Income Multi-Asset Fund, provide DC savers with a diversified exposure to a broad range of markets by investing in a range of assets, countries, sectors and currencies. All with the aim of avoiding a concentrated exposure to any one type of asset.

Risk-aware long-term investment goals vs. short-term gains

Over the last few years, multi-asset investors have found out that it can feel quite painful to miss out on the returns that, with the benefit of hindsight, a more concentrated portfolio would have generated.

For example, LGIM's Multi-Asset Fund invests in infrastructure, which is generally considered lower risk than UK equities. But it generated growth of 23% during 2014, strongly outperforming UK equities which in contrast only generated 1% in returns.

However, just because an asset class demonstrates strong performance, even if it is over an extended period of time, it doesn't mean that this performance will continue into the future.

Multi-asset investors own a wide spread of assets, so it is unlikely that returns will be outstanding, as that would require everything to perform at the same time. But, it will likely provide a source of sustained and systematic returns that those investing in a smaller number of assets can't benefit from.

Designed with pensions in mind

LGIM's multi-asset funds are solutions designed and managed in a risk-aware fashion to meet our pension investors' needs at all stages of their investment journey.

DC savers wanting to grow their assets may want to consider LGIM's Multi-Asset Fund, which is designed for long-term pension investors looking to access the benefits of asset class diversification in a single solution. The fund has a strategic asset allocation that is long-term focused which is implemented through a wide range of index funds as portfolio building blocks. This ensures that the fund remains a simple, transparent and cost-effective solution for our investors.

For DC savers thinking about their options heading into retirement, our award winning Retirement Income Multi-Asset Fund provides an income drawdown solution for those looking for an alternative to buying an annuity. We understand that alongside investment risk, there's also the risk that investments do not provide enough income to meet a pensioner's needs over their retirement. The fund has been designed and is managed with this in mind, and therefore aims to generate enough long-term investment growth up to and during retirement, while providing investors with a sustainable level of income.

We understand the importance, for many investors, of being able to retain a certain amount of flexibility in retirement. As Martin Dietz, the Fund Manager for the Retirement Income Multi-Asset Fund highlights about drawdown in his introduction to the fund,

"we understand all investors will be different, with different needs in terms of the frequency and size of the drawdown that they would want to make, and we therefore don't want to be prescriptive in this regard."

Watch the video of LGIM Fund Manager Martin Dietz introducing the LGIM Retirement Income Multi-Asset Fund