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Retirement planning: capital protection, growing dividend

Investment companies are more closely aligning their mandates with retirees’ needs for protection against volatility and growing dividends, says the AIC’s Jemma Jackson

If you are a close follower of the investment company sector, it should not have escaped your attention that the AIC has been making a good deal of noise on pensions since the forthcoming changes, due in April, were announced. For clients who don’t mind taking on board higher risk for potential higher returns, the sector as part of a well-balanced portfolio has a lot to offer, both for those looking to build a pension pot over the long-term, or for those looking to draw a steady income in retirement.

Clearly the forthcoming changes, with the removal of the compulsion to buy an annuity soon to become a thing of the past, has appealed to product planners too, and we have already seen some interesting proposals in the investment company sector.

Responding to the 2015 pension changes

At the end of October, British Assets Trust announced its intention, subject to shareholder approval, to change its management to BlackRock and adopt a multi-asset income mandate – the sector’s first attempt to respond directly to the opportunities the forthcoming pension changes will create. The board commented that the proposals present ‘an innovative way to capitalise on the very attractive opportunities presented by recent legislative changes relating to UK pensions’.  The aim is to combine the low volatility, capital preservation characteristics of multi-asset vehicles with a growing dividend, supported by revenue reserves.

Analysts at Winterflood commented that “this allows the fund greater dividend certainty and provides it with an advantage over an equivalent open-ended fund.” Indeed, it is the flexibility of the investment company structure to retain some of the income received each year and squirrel it away for future, leaner years in order to help ‘smooth dividends’ through both the good times and the bad, which has helped the sector develop such an enviable dividend track record. Winterflood wrote of the proposals that, “in our opinion these proposals mark an important inflection point in the evolution of investment trusts and the sector’s attempts to meet changing investment needs. We suspect many across the industry will monitor British Assets’ progress carefully and it seems likely that others may consider following its lead.”

Multi-asset vehicles

There are plenty of multi-asset vehicles in the investment company space currently, as Personal Assets Trust aptly demonstrates, and its shares are held in strong regard. The objective of the company is to ‘protect and increase shareholders’ funds (in that order) over the long-term by investing in equities and fixed income securities. The company currently has around 24% of its assets in cash/cash equivalents and 22% in fixed interest. As an aside, in case readers are interested in the rest of the portfolio, it’s interesting to find Berkshire Hathaway in the company’s top holdings, alongside such companies as Sage Group, Imperial Oil Limited, British American Tobacco, Microsoft, as well as a penchant for soft drinks, with Coca-Cola Co and Dr Pepper Snapple Group, Inc., all amongst the top holdings.

Needless to say, it will be interesting to see if we begin to see more multi-asset type vehicles – since the flexibility of the structure lends itself well to this. Alan Brierley, investment company analyst at Canaccord Genuity, made an interesting point on the back of British Assets’ announcement, writing that “after a bull market lasting five and a half years, challenges lie ahead and in this environment, those companies with highly diversified portfolios, lower risk profiles and greater defensive characteristics have obvious appeal.” There are, of course, no prizes for guessing Alan’s position on the outlook for markets here!

For now, the sector is certainly seeing increased demand from both advisers and direct investors, and discounts are at a record low whilst assets are at an all-time high. Clearly, positive markets and strong investment company performance have helped. It was less than two years ago that the sector broke the £100 billion assets under management barrier, quickly rising to some £118 billion by the end of October 2014. The average discount is also at its narrowest on record, at just 3%. Much of the demand has been focused on income sectors, from the traditional UK Equity Income sectors through to the more specialist sectors such as infrastructure and debt.

The sector has a way to go on its journey with advisers, but the sector does have the ability not only to keep doing what it does best within those solid, generalist sectors, but to also constantly reinvent itself, as the growth of the alternatives space such as infrastructure and debt demonstrates. Time will tell if the forthcoming pensions changes prove an important catalyst in the sector’s development in the future – but it certainly looks possible.

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