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March 2020
Volatility is a constant challenge for advisers and clients
Could smoothed funds provide a solution?
Smoothing the way
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Introduction by Money Marketing investment editor Charlotte Richards
The search for income in retirement has been almost a buzzword in recent times. Since the requirement to have an annuity was abolished back in 2014, many providers have been seeking new solutions for those who are nearing or now in retirement who have a decreased capacity for loss and a lower risk profile.
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Smoothed funds have created a space for those with a low-to-medium risk appetite, in the form of multi-asset risk-rated funds designed to deliver lower volatility for investors. The concept is similar to that of with-profits funds, which were very popular in the 1980s and 1990s. Smoothing can remove day-to-day worries that arise from short-term market volatility, and tend to come with a long-term (five or more years) view. In this supplement, we take a comprehensive look at the role of smoothed funds and those they are most suited to. How advisers use them within a balanced portfolio for those at retirement can differ, so finding the right suitability and solution can be key. Volatility has been an issue over the past few years and it is something retirees would want to shy away from. We also look at how volatility needs managing, particularly for the low-risk client. A lack of product capability, particularly in technology, is something we take a closer look at in this supplement, finding out how it could make it difficult for clients to manage the challenging decumulation phase, and how changing propositions and having a coherent strategy can help as much as product choice.
Features
The role of smoothed funds
Volatility and the rise of the low-risk client
The retirement race: Why it matters to decumulation
Partner content
Critical mass
An interview with LV='s Clive Bolton
LV= Smoothed Managed Fund range
© Metropolis Financial Platforms Ltd 2020. ALL RIGHTS RESERVED
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By Hannah Smith
the role of smoothed funds
When managing pension drawdown for risk-averse clients in volatile markets, advisers find smoothed funds a vital tool
Advisers have a wealth of products to choose from in today’s marketplace to help them solve common problems facing their clients. Perhaps the most pressing challenge is the need to carefully manage pension drawdown while navigating volatile markets. Insurers’ asset management divisions have a number of solutions to present to advisers and their clients, and smoothed funds are a key part of their offering.
What are smoothed funds?
You may recognise the concept of smoothed funds from the old-style with-profits funds that were popular in the 1980s and 1990s. But the new generation of smoothed funds represents an evolution from the with-profits products of the past. Today’s smoothed funds are multi-asset vehicles designed for investors with limited appetite for risk. While there are only a handful of providers offering them, some of the funds themselves are very large, so it is still a big market, notes Willis Owen head of personal investing Adrian Lowcock. He explains: “These funds are just trying to smooth out performance in the market for those who worry about the day-to-day volatility you often get in investing. Providers offer a range of multi-asset funds that suit the adviser market as a one-stop-shop for clients.” With markets increasingly volatile, investors approaching retirement are nervous about protecting their capital. Smoothed funds can offer some relief by levelling out the peaks and troughs in markets in the fund’s return profile. Ideally a client will remain invested for at least five years. Different providers will use different mechanisms to smooth returns but, essentially, they do it by adjusting the unit price of the fund. So, rather than use the real underlying unit price, they might value the fund based on its average price over a certain period, for example. Or they might alter the unit price based on the expected growth rate of the fund. The aim is to store up capital when performance is good and deploy it when performance is weak. When markets are dropping, the smoothing mechanism cushions the blow, but it also means that, when share prices shoot up, the gains your clients see will be less dramatic. Overall, the idea is that the investor gets a more predictable and consistent return, rather than a hair-raising ride in the markets. Some smoothed funds will give you the option to add a capital guarantee for extra peace of mind, but this comes at a price.
‘These funds are just trying to smooth out performance for those who worry about day-to-day volatility’
Pros and cons
Lowland Financial managing director Graeme Mitchell says his main concern about smoothed funds is that they may not be entirely smooth – he points out that two high-profile funds fell sharply at the end of 2018. The other issue is cost, because some funds charge 1 per cent or more and may have moderate exposure to equities, so the returns may not always offset the fees. That said, some of the longer-term returns on these funds have been “pretty decent” so it is “horses for courses”, he says. “That’s not to say there’s not a place for them and I do have clients who have invested in them as a halfway house between cash and being directly in the markets,” adds Mitchell. “But it is still a market-led investment and it can go down.” Hannay Investments chartered financial planner Vanessa Barnes says her firm has done its own analysis comparing the risk and reward of a blended portfolio, including smoothed funds, versus a more conventional unit-linked fund, and has found that the former gives index-like returns with “significantly less risk”. “That’s where they really add value to a portfolio,” she says. For her, the disadvantages are cost and the potential for lower liquidity, given that a multi-asset fund can hold real assets such as infrastructure that could take longer to sell. This could mean investors might struggle to get their money out without facing a valuation adjustment. “To just see them as a cash alternative is dangerous. They’re not very liquid; they can be subject to price adjustments,” says Barnes. “You can put a guarantee on, but the guarantee makes them very expensive, and they’re generally more expensive anyway. So they are not a panacea, but they certainly have a place in a lot of portfolios.”
‘Smoothed funds are not a panacea, but they certainly have a place in a lot of portfolios’
How do advisers use them?
While some advisers might choose to use smoothed funds as a one-stop-shop, many prefer to use them as part of a blended solution. Barnes regularly uses smoothed funds successfully with her clients for two main purposes: profit taking, and to generate medium-term money during decumulation. She explains that some clients have done exceptionally well in the markets over the past decade but are now a bit nervous as they approach retirement. With uncertainty and volatility rising, they are aware that things could change over the next three to five years. “Therefore, what we have done is regularly take profit from more equity-exposed portfolios and put that into a smoothed return fund in order to add some stability and protect some of the downside,” Barnes explains. “That also means, if people start wanting to take an income, even if the market’s performing badly, we’ve got a backup fund that we could take a reasonable income from as a good alternative.” She also uses smoothed funds to support clients’ five-year money requirements in decumulation, focusing more on cash or near-cash for the shorter term, and on equities over a five- to eight-year period.
Case study
Hannay Investments has a client who has been with the firm for 30 years and has been good at paying in to tax-efficient savings vehicles, such as Tessas, Peps and Isas. She continued working beyond normal retirement age but has finally decided to retire in a year’s time. Her £150,000 of savings contributions had turned into £320,000, so her adviser put £150,000 into a smoothed fund and left the rest invested through Isas. The client is now starting to take an income, confident that she is still invested for capital growth. “Someone in her position isn’t going to go back to work and earn it all again. She’s in an environment that has limited downside. Generally speaking, smoothed funds allow you to continue taking your income, even if there is a valuation adjustment,” says Barnes. “And, because that money is profit she has made and the rest is still invested, she feels empowered to spend that money.”
Identifying the right funds for clients
Because there is only a handful of major providers, the market is not a difficult one for advisers to analyse. But due diligence will, of course, still be required. Mitchell says one of his reservations about the space is that funds can appear opaque and do not publish a lot of detail about their underlying investments. “It’s hard to figure out what’s going on under the bonnet, and it requires a level of trust in the companies not often matched by the results,” he says. Barnes agrees that, over the years, these funds have not been very transparent. But she meets with providers and quizzes them on how they run the portfolios. “They’re very open about the kinds of thing they’re invested in - more unusual things such as infrastructure. We talk to them about what they see happening, their smoothing mechanism, what’s gone wrong and what’s gone right. We also use research from Square Mile, which gives very good analysis of those kinds of fund,” she says. Smoothed funds will not suit everyone. However, whether you use them as a standalone product or as part of a blended solution, they could work well for risk-averse clients who are approaching retirement and who want some reassurance in choppy markets.
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By Cherry Reynard
Whatever the chosen solution, investors must recognise that volatility needs managing at crunch points in their investment life-cycle
Stockmarket investment would be easy were it not for all that uncomfortable volatility. However, with interest rates at historic lows, investors have little choice but to embrace it. In managing volatility, particularly at retirement, investors cannot simply sit tight and ride out the storm because it can impact their long-term wealth in several crucial respects. Low interest rates have forced investors up the risk scale and into more volatile assets. Lower-risk assets such as cash or government bonds no longer deliver an above-inflation return, which makes them a poor choice for long-term investment. As such, investors have been forced reluctantly into higher-risk areas, such as the stockmarket or corporate credit. This is particularly true for income investors: the UK 10-year gilt yield now sits at just 0.5 per cent, while inflation is at 1.3 per cent (to December 2019). Providers have had to step up and create investment solutions to help mitigate any volatility in the search for income in retirement. Many providers have multi-asset options, while others have opted for smoothed funds, designed with growth in mind for the more risk-sensitive client. A smoothed managed fund could be an attractive option in times of market volatility for retirees (or those nearing retirement) with a much lower capacity for loss. While investors have had to embrace some volatility, stockmarkets have lacked volatility by historical standards. Over the past eight years, the Vix index, the widely accepted measure of US stockmarket volatility, has exceeded 20 only a handful of times. From August 2007 to early 2012 it was almost permanently above 20 and it reached almost 60 at the height of the financial crisis. Similarly, from May 1997 to May 2003 it barely dipped below 20 at any point. Historically, this has been one of the longest periods of low volatility. The received wisdom is that lower-risk investors need to avoid volatility where possible. Asset Intelligence head of research Robert Love points out: “Investors can sometimes overlook the fact that volatility is a two-way street. Volatile investments are, of course, subject to losses in capital value, but it is the very same characteristic that generates growth too. “When thinking about the subject like this, volatility becomes less something to avoid and rather something to manage and corral to investors’ own benefit.”
Key points in life-cycle
It would be easy to conclude that investors should simply ignore volatility. Nevertheless, there are key points in an investor’s life-cycle when it is important to avoid volatility. Throughout most of the ‘accumulation’ years, investors can afford to look through volatility. They may have a 20- to 30-year investing horizon, so short periods of volatility are not as likely to impact long-term returns. However, volatility becomes a problem as investors near retirement and have less choice about when to sell out of higher-volatility assets. This is sequencing risk. Studies show that the sequence in which returns are achieved matters for wealth in retirement. Specifically, it can be tough for investors to recover from a difficult year for markets in the early stage of retirement. A significant drawdown, coupled with income withdrawals, leads to the familiar problem of ‘pound-cost ravaging’, where investors are trying to create an income from a smaller and smaller pot. In contrast, a bad market where the portfolio has been paying out for the long term is notably less damaging. A second problem is that volatility can make investors act irrationally. Love says: “Data has historically shown a strong correlation between flows out of higher-risk investment products and periods of market volatility. “Unfortunately, these buy-and-sell decisions are often poorly timed, with investors giving up on volatile investments in poor periods for the market and selling out at the bottom.”
Anxiety-adjusted returns
Oxford Risk head of behavioural science Greg Davies talks about anxiety-adjusted returns. “This is the best performance they can get relative to the stress, the anxiety, the discomfort they will have to endure over the investment journey. We should not be maximising risk-adjusted returns; we should be maximising anxiety-adjusted returns.” Davies says that, even where investors have had the same return over time, the journey they have taken to get there will influence their subsequent decision-making. He adds: “The emotional state a person is in at the end of the journey will change their subsequent decisions. The right answer is blended in with a whole load of emotional desires. Also, that decision-making depends on who someone is as an individual. “The key with financial advice is that the right thing to do is almost never the comfortable thing to do.” However, if investors have experienced less volatility on their journey, they may be more inclined to do the right thing at retirement. Having concluded that, at certain stages, investors need to care about volatility, what can they do? It is difficult to predict. Volatility measures are historical, and the assumed volatility of different asset classes is based only on the volatility they have displayed previously. This is an imperfect way to predict future volatility. For example, it may be a problem where there has been a long period of benign volatility but then circumstances change. Some of the largest companies in the US and global indices have been supported by inflows from passive funds – which broke through the $10trn (£7.7trn) mark in 2019. This has kept share price volatility low for those companies, but there could be an abrupt reversal should these fund flows change. Measures to manage volatility directly are also imperfect. It is possible to get Vix exchange-traded funds, although this would manage out good volatility (when prices rise rapidly) as well as bad volatility. There are low-volatility ETFs, which target only low-volatility companies, but again, this relies on the past performance of share prices continuing into the future. The Targeted Absolute Return sector has been deemed another solution to manage volatility. Many funds in the sector target an equity-like return with around half the volatility of equity markets. However, relatively few have delivered it. While they can be a useful addition to a portfolio, providing a lowly correlated, diversifying element, they are not a solution in themselves. Love says: “It takes a strong stomach but during such times investors must try and remember why they wanted exposure to a particular asset or fund in the first place, and if, in fact, it is behaving as it would reasonably be expected to in such conditions. If there are good answers to both these questions, investors may be well served by sitting tight.” It is difficult to suggest a better answer than the tried-and-tested approach of holding a well-managed blend of asset classes over time. However, whatever the solution, it is important for investors to recognise that volatility needs to be managed at crunch points in their life-cycle. It can have an impact on retirement wealth but, thanks to sequencing risk, it can also make investors take bad decisions.
‘The right thing to do is almost never the comfortable thing to do’
‘Investors can sometimes overlook the fact that volatility is a two-way street’
This is supported by the well-known Dalbar survey, which, year after year, shows that investors get a poorer return than the market because of their inclination to sell out at times of market volatility. In 2018, for example, the survey showed investors’ poor timing that saw them experience a loss of 9.42 per cent on the year compared with the S&P 500 index, which retreated only 4.38 per cent. As such, advisers should not underestimate the importance of lower volatility in keeping people invested, which is more important – on the whole – than where they are invested. While advisers play a vital role in providing reassurance, investors often need comfort and emotional support along the investment journey.
By Leah Milner
Advisers say a lack of product capability makes it difficult for them to manage risk in the challenging decumulation phase
Designing an investment strategy for drawdown clients is one of the most complex areas of financial planning and one in which product innovation has been limited. In the wake of pension freedoms, many retirees are looking to their financial adviser to devise a plan that ensures their savings will last a lifetime. Managing risks for a client in the decumulation phase can be extremely challenging and advisers say providers’ systems are not always well designed for this purpose. Balance Wealth Planning managing director Rebecca Aldridge says: “There is a lack of product capability. It is a technology issue for providers to create systems that can deal with more complex strategies. Some providers cannot even arrange phased drawdown from a pension, which is a real necessity for the majority of scheme members. A lack of administrative capability is stopping providers from offering what should already be commonplace.” The decumulation stage of investing can be a balancing act between keeping on generating an income to sustain a lifestyle, preserving capital, as well as maintaining the flexibility needed in investment. For clients looking to cover all bases, smoothed managed funds could play an integral role in a portfolio. One of the key elements of a smoothed managed fund is that they are designed to generate long-term growth, something that is vital for the UK’s ageing population as more are in the decumulation period for longer than ever before. Aldridge explains that advisers managing a decumulation strategy would normally look to take income from the least volatile portfolio so as not to impact as much on future growth. But she says: “Most systems do not have the capability to have several portfolios managed simultaneously and allow you to dynamically move from one to another. “What it means is that either advisers do not offer [a decumulation strategy] at all because it is too much of a headache, in which case investors are potentially missing out, or they attempt to do it and find that it is actually quite complicated and burdensome, so it is costly.” Intelligent Pensions technical director Fiona Tait says cashflow modelling tools are very helpful when illustrating to drawdown clients how longevity affects their income requirements. “People underestimate how long they will need an income and how much money is required to produce it,” she says. While Tait believes that advisers are getting better at managing decumulation strategies, she thinks there is still room for improvement. “I suspect that when the FCA carries out its review it will find there are some advisers who have yet to adapt. But they are getting better. She adds: “The fact that commercial cashflow planners are available does help hugely and there are some managed funds that have been created specifically for decumulation. For some advisers it will be easier to use these ready-made solutions, while others will use discretionary fund managers. We do it ourselves because we have always specialised in this market.”
Avoiding sequencing risk
Managing volatility is particularly important when clients are in decumulation. Tait explains: “You have to make sure that the withdrawal strategies you are using are not adversely impacted by sequencing risk. If your withdrawals happen at a bad time in the market, it is possible that your fund may never fully recover from that; but, on the other hand, if there are a lot of good returns in the market at the start of your plan when withdrawals are coming out, that is great.” Another issue that Tait feels the industry needs to address is the way that the pricing structure of fund managers and some financial advisers favours those who are accumulating wealth over those who are decumulating. She says: “You have charges that apply according to fund size and providers that offer discounts for larger funds, which is great if you are accumulating assets but potentially quite expensive as your fund gets smaller. “It is an area that product providers and advisers should look at to make sure we are delivering value because, arguably, the advice at this point is even more essential.” Although Tait agrees there has not been a great deal of product innovation for clients at retirement, she does not feel there is a shortage of options for advisers. “Actually it is possible to put together a very good portfolio with products that are already out there.”
‘A lack of administrative capability is stopping providers from offering what should already be commonplace’
Coherent strategy
New research by consultancy The Lang Cat found that only 10 per cent of adviser firms changed their centralised investment proposition for clients at retirement. However, the survey of 400 advisers conducted in November and December last year revealed that 45 per cent of respondents did change their process for those in decumulation. The Lang Cat founder Mark Polson agrees with Tait that a coherent strategy is more important than product choice. He says: “When we are talking about centralised investment propositions and retirement propositions, the important thing is not really the kit at the end of the chain – which portfolio you use. It is the process you use to decide what you are going to do, and making sure it is consistent. “Where advisers are really strong is that they have certain processes when dealing with clients who are planning to take an income. That does not necessarily mean using different funds or portfolios, because many firms work on a total return basis so they do not run natural income strategies.” “For essential spending, we would like to have that as guaranteed as possible. So we look at what state pension and defined benefit pension the client has and, if there is a gap between that and what they need to pay their regular bills, we recommend an annuity. After that we would look for investment solutions that only supported the discretionary spending; they give the client the option of flexing what they take according to how much return they actually get.” With drawdown money, keeping the funds needed for withdrawals in the immediate future in cash or near-cash means it is possible to take more investment risk with the pot set aside for the long term, adds Ingram. Alongside this, advisers can look to cover other risks with products such as critical illness policies. Ingram points out that pension freedoms also brought the liberalisation of the annuities market, with guaranteed products available for up to 40 years where previously they were offered for only 10. She says these can be useful for couples where there is an age gap, as guaranteeing the income on the single life of the older client may be better value than opting for a joint life policy with the younger, healthier spouse. Delving into detail around a client’s medical history can also prove highly beneficial. “Around 62 per cent of our clients qualify for enhanced annuity rates, but when you speak to people they often underplay health issues. It is only when you ask them questions like what medication they are on or whether they have ever smoked that you find out the full picture,” says Ingram. Polson believes the focus on how advisers manage their clients’ portfolios at retirement will sharpen as future generations of workers reach pension age. He says: “Currently, most clients are not depending on the income they are withdrawing from their drawdown pots. That is a function of demographics. The people who are coming through to retirement now are the cohort who had DB schemes. “That is going to change over the next 10-20 years and the profile will really shift. That is the critical time for the industry to think about how we are actu-ally going to do this.”
For LEBC director of public policy Kay Ingram, there are many clever ways in which advisers can combine products to manage the risks for their clients and deliver great value. She says: “One of the strategies that we use is to look at the client’s income needs in terms of both essential spending and discretionary spending, and to treat the two things differently.
New research by consultancy The Lang Cat found that only 10 per cent of adviser firms changed their centralised investment proposition for clients at retirement. However, the survey of 400 advisers conducted in November and December last year revealed that 45 per cent of respondents did change their process for those in decumulation. The Lang Cat founder Mark Polson agrees with Tait that a coherent strategy is more important than product choice. He says: “When we are talking about centralised investment propositions and retirement propositions, the important thing is not really the kit at the end of the chain – which portfolio you use. It is the process you use to decide what you are going to do, and making sure it is consistent. “Where advisers are really strong is that they have certain processes when dealing with clients who are planning to take an income. That does not necessarily mean using different funds or portfolios, because many firms work on a total return basis so they do not run natural income strategies.” For LEBC director of public policy Kay Ingram, there are many clever ways in which advisers can combine products to manage the risks for their clients and deliver great value. She says: “One of the strategies that we use is to look at the client’s income needs in terms of both essential spending and discretionary spending, and to treat the two things differently. “For essential spending, we would like to have that as guaranteed as possible. So we look at what state pension and defined benefit pension the client has and, if there is a gap between that and what they need to pay their regular bills, we recommend an annuity. After that we would look for investment solutions that only supported the discretionary spending; they give the client the option of flexing what they take according to how much return they actually get.” With drawdown money, keeping the funds needed for withdrawals in the immediate future in cash or near-cash means it is possible to take more investment risk with the pot set aside for the long term, adds Ingram. Alongside this, advisers can look to cover other risks with products such as critical illness policies. Ingram points out that pension freedoms also brought the liberalisation of the annuities market, with guaranteed products available for up to 40 years where previously they were offered for only 10. She says these can be useful for couples where there is an age gap, as guaranteeing the income on the single life of the older client may be better value than opting for a joint life policy with the younger, healthier spouse. Delving into detail around a client’s medical history can also prove highly beneficial. “Around 62 per cent of our clients qualify for enhanced annuity rates, but when you speak to people they often underplay health issues. It is only when you ask them questions like what medication they are on or whether they have ever smoked that you find out the full picture,” says Ingram. Polson believes the focus on how advisers manage their clients’ portfolios at retirement will sharpen as future generations of workers reach pension age. He says: “Currently, most clients are not depending on the income they are withdrawing from their drawdown pots. That is a function of demographics. The people who are coming through to retirement now are the cohort who had DB schemes. “That is going to change over the next 10-20 years and the profile will really shift. That is the critical time for the industry to think about how we are actu-ally going to do this.”
By Natasha Turner
Clive Bolton, managing director of savings and retirement at LV=, says this year the mutual is strengthening its focus on mass affluent clients, who may need to use their entire pension pot in retirement and require high-quality advice
Five years on from the introduction of pension freedoms, it is still difficult to determine what the long-term impact of this legislation will be. How will those currently in their 60s fare in retirement as they move into their 70s and beyond? For one group of people, monitoring the impact is key. The mass affluent - those with, for example, between £100,000 and £500,000 in their pension at retirement - may need to use the whole of their pot in retirement, meaning careful planning and suitable products are vital. “This is the toughest nut to crack from an advice and product perspective” says LV= managing director, savings and retirement, Clive Bolton. “This is [defined benefit] heartland. A lot of these people would have worked for the same blue-chip company [throughout their career], although of course we are seeing fewer and fewer people retiring with a DB pension. “So, when you start spreading, say, £350,000 over 30 years of retirement, the state pension still plays a substantial part, and you need quite a lot of planning and potentially a combination of investments and guarantees in your portfolio.” Bolton, who joined LV= in January last year, adds that this group would still be interested in guaranteeing part of their income, which could be their pension, “but there’s a realistic expectation you will use all your funds in your lifetime”.
How LV= targets the mass affluent
A focus on the mass affluent is not new for LV=, but this year a series of changes will help solidify this aim. In January the mutual insurer waived its 0.15 per cent annual service charge for new customers in their first year, when they invest 100 per cent of their LV= pension in their Smoothed Managed Funds. “We’ve also started to give LV=’s mutual bonus more prominence,” says Bolton. “ I should say the smoothed managed funds within the Isa are not with-profit, but in the bond and pension wrappers they are. They attract a mutual bonus after a year and so, to complement this, for the first year we’re waiving platform fees. “We’ve modified those because we used to have a flat rate [0.25 per cent up to £1m],” says Bolton. “It’s now significantly lower for people who have between £100,000 and £500,000 and beyond, and consequently slightly more expensive for those who have smaller amounts,” says Bolton. Last year LV= reviewed its strategic asset allocation to ensure the right mix for that type of low-risk fund. The smoothed range comprises cautious, balanced and managed growth funds, risk rated at 3, 4 and 5. The review ensures “these ratings will stay consistent and not drift higher”. Later this year, LV= will announce its investment in a new equity release platform. “You’re beginning to see that those people who are going to use all of their pension money will potentially need to access some of their house wealth as well, which is their other main asset, hence the new equity release platform,” says Bolton. “I think you’ll see us upgrade our digital assets and the way IFAs interact with us,” he adds. “We’ll move towards integrating ourselves with the more common adviser administration systems. Rather than make individuals or advisers come to our portal, we’ll integrate with their systems.”
ESG investing
LV=’s new tiered charging structure applies not just to its smoothed managed funds and passive funds but also to some of its environmental, social and governance funds. Is there an appetite for these among the mass affluent? “When we analyse the needs, demands and values of the mass affluent, ESG funds are a no-brainer,” says Bolton. He points out the mass affluent segment can drive environmental change. For example, electric cars may appeal to those who are conscious of their emissions but they can be expensive to buy and run, making them less accessible to a younger, perhaps less affluent audience. “Not only are these cars expensive, you’re probably going to have to alter your home, have off-road parking and upgrade your domestic supply so you can charge it, so you need those wealthier early adopters to get it off the ground to get critical mass,” he says. “They’re in that transition stage where they’re neither contributing to nor drawing from their pension, and I think that’s really important as we start to reassess people’s retirement date,” he says. Bolton adds: “There is mounting evidence that there are both mental health and social benefits from people [retiring later]. “Staying in work for longer and keeping your brain active does improve your mental health.” In terms of LV=’s own ESG funds, Bolton says the industry’s attitudes have matured. “We used to be focused on leading-edge green companies as the green economy grew, but we’ve broadened it to [incorporate the] understanding there are some industries that just aren’t going to last.”
‘When you start spreading, say, £350,000 over 30 years of retirement there’s a realistic expectation you will use all your funds in your lifetime’
Social trends
If pension freedoms and regulation were seminal changes from the past decade, Bolton says the next 10 years in the industry could be driven by these social trends. “I genuinely think some people will take a more considered view about giving back, partly because they will have more active time on their hands, and the psychology of saving will change and probably broaden away from ‘It’s my pension,’” he says. “There is a real role for advice in this,” he adds. “We’re seeing efficiency in the advice process; we’re beginning to see AI help with that. As we continue to see progress in this area, our industry will be able to increase our support of this important customer segment.”
If pension freedoms and regulation were seminal changes from the past decade, Bolton says the next 10 years in the industry could be driven by these social trends
“That means you don’t pay the platform fee in the first year and, when you do pay, you may be rewarded with an investment boost through the mutual bonus.” Then in February LV= introduced a tiered charging structure on its personal pension that meant those with larger pension pots would see a reduction in their charges.
CV
Clive Bolton
Non-executive member of the civil service pensions scheme advisory board, Cabinet Office
Consultant on pensions and intergenerational fairness, International Longevity Centre
Managing director, retirement solutions, Aviva UK Life
General insurance (international) operations director, Aviva Group
Pricing director, Norwich Union General Insurance
2018-present:
2017-present:
2006-17:
2004-06:
2000-04:
2019-present:
Managing director, savings and retirement, LV=
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Similarly, Bolton thinks the mass affluent are likely to lead social trends, such as working for longer. LV= research found 32 per cent of people in their 60s left their pension untouched, with nearly half of the demographic still working. Sixteen per cent of those over 70 did the same, with a quarter saying it was because they were still working.
LV=’s new tiered charging structure applies not just to its smoothed managed funds and passive funds but also to some of its environmental, social and governance funds. Is there an appetite for these among the mass affluent? “When we analyse the needs, demands and values of the mass affluent, ESG funds are a no-brainer,” says Bolton. He points out the mass affluent segment can drive environmental change. For example, electric cars may appeal to those who are conscious of their emissions but they can be expensive to buy and run, making them less accessible to a younger, perhaps less affluent audience. “Not only are these cars expensive, you’re probably going to have to alter your home, have off-road parking and upgrade your domestic supply so you can charge it, so you need those wealthier early adopters to get it off the ground to get critical mass,” he says. Similarly, Bolton thinks the mass affluent are likely to lead social trends, such as working for longer. LV= research found 32 per cent of people in their 60s left their pension untouched, with nearly half of the demographic still working. Sixteen per cent of those over 70 did the same, with a quarter saying it was because they were still working. “They’re in that transition stage where they’re neither contributing to nor drawing from their pension, and I think that’s really important as we start to reassess people’s retirement date,” he says. Bolton adds: “There is mounting evidence that there are both mental health and social benefits from people [retiring later]. “Staying in work for longer and keeping your brain active does improve your mental health.” In terms of LV=’s own ESG funds, Bolton says the industry’s attitudes have matured. “We used to be focused on leading-edge green companies as the green economy grew, but we’ve broadened it to [incorporate the] understanding there are some industries that just aren’t going to last.”
A range of multi-asset, risk-rated funds designed to grow your client’s money while providing them with a reliably low-volatility investor experience.
Smoothed Managed Fund range
The smoothed return profile makes these funds particularly attractive for investors who: • feel discomfort with, and will find it difficult to stick with, a volatile investment journey, or • need to feel confident that downside risk is reduced.
Client suitability
• Unique, transparent smoothing process based on past performance, not future • Funds risk-managed to maintain 3, 4 and 5 risk-ratings from Defaqto and Distribution Technology • Fund management in partnership with Columbia Threadneedle Investments • Optional capital guarantees available (varies by product selected)
Reasons to invest
The funds invest in a diversified portfolio of fixed interest securities, equities, property, cash and other related instruments.
Fund overview
Cautious
Objective:
Long-term steady growth with a low level of investment risk
Risk-rated
3
AUM: £726.80m EBR: 30.3% EBR range: 15% – 35%
Balanced
Long-term moderate growth with a low to medium level of investment risk
AUM: £674.40m EBR: 49.5% EBR range: 35% – 55%
4
Growth
Long-term growth with a medium level of investment risk
AUM: £327.76m EBR: 63.5% EBR range: 50% – 70%
5
Ratings and data correct as at 31 January 2020. Fund risk ratings provided by Distribution Technology and Defaqto.
Fund performance
Annualised performance provided on a smoothed basis as at 31 January 2020.
Our range of Smoothed Managed Funds can be accessed through three distinct LV= product solutions:
How to access
LV= Flexible Guarantee Funds
Pension
LV= Flexible Guarantee Bond
Bond
LV= ISA
ISA
Find out more at www.lv.com/smoothed
This document is for professional clients only and is not for consumer use. All information in this document is dated as at 31 January 2020, unless otherwise stated. The interview is strictly for general information purposes only. Where individuals have expressed opinions, they are based on current market conditions and may differ from those of other investment professionals. Any opinion given is given for the purposes of an interview only and is not given as advice or to be relied on in any way. If anyone wants to act on the information then they take their own responsibility for that and should, for example, take their own advice first. LV= does not guarantee the accuracy or completeness of any of the information discussed in the interview. For the most up to date information on our funds, please refer to product information and documentation available on LV.com/adviser. The performance of the LV= funds shown is based on smoothed returns before annual management charge, which is taken by unit deduction. Past performance is not a reliable indicator of future results. Investment value can go up and down. Clients may get back less than they paid in. Our smoothing process does not prevent investments from dropping in value. Smoothing will not prevent losses in longer term falling markets. In exceptional market conditions (when the underlying price is 80% of the averaged or ‘smoothed’ price) the fund will be valued on the underlying price. We reserve the right to suspend smoothing at any time. Smoothing isn’t applied in the first 26 weeks after investment or a fund switch. Whilst smoothed funds have the benefit of reducing downside risk, in the event of rising markets funds will grow more slowly due to the effects of smoothing. Liverpool Victoria Financial Services Limited, Tilehouse Street, Hitchin, SG5 2DX LV= and Liverpool Victoria are registered trademarks of Liverpool Victoria Financial Services Limited (LVFS) and LV= and LV= Liverpool Victoria are trading styles of the Liverpool Victoria group of companies. Liverpool Victoria Financial Services Limited, registered in England with registration number 12383237 is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, register number 110035. NM Pensions Trustees Limited, (registered in England No. 4299742), acts as scheme trustee. LVFS is the ISA Manager. LV Equity Release Limited is registered in England (No 1951289) and is authorised and regulated by the Financial Conduct Authority (register number 306287). Registered address for all companies: County Gates, Bournemouth BH1 2NF. Tel 01202 292333.
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