The diversification benefits on offer from multi-asset funds make them an attractive option for advisers whose clients are reluctant to look beyond cash to achieve their long-term goals, says Tony Stenning, head of UK retail business at BlackRock
Benefits of diversification in multi-asset funds
With the UK economy showing tentative signs of recovery and the encouraging changes to saving and pension rules introduced by Chancellor of the Exchequer George Osborne, people in the UK are probably more open to a new conversation about their saving and investment habits than they have been for some years.
The reaction to the Chancellor’s ‘liberalisation’ of pension and saving regulations earlier this year was instructive as it first brought about an overwhelmingly positive response, but then highlighted the level of confusion people have about the best ways to save for the long term.
“People across the social spectrum – from wealthy households to those at the start of their career – are using cash as an oversized comfort blanket.”
People will need a lot of coaxing out of the habits they have built over the past six years in particular – especially when it comes to taking steps out of cash. Despite enduring a period of low interest rates and higher-than-average inflation, there is a deep reluctance to take any risk with their money. These are the findings of BlackRock’s global Investor Pulse survey, in which 2,000 people in the UK were asked about their aspirations and their attitudes to investing.
The survey found people prioritise long-term goals such as funding a comfortable retirement and growing their wealth. However, many are reluctant to look beyond cash to achieve these goals. In fact, people in the UK have an average 68% allocation to cash. Even among better-off investors, a third think cash is the best asset class to generate a regular income. Similarly, a third of affluent investors think cash is the best choice to grow their wealth.
People across the social spectrum – from wealthy households to those at the start of their career – are using cash as an oversized comfort blanket, with more than half saying they are not willing to take any risk with their money at all and only 19% willing to take on more risk to achieve a higher return. The way people are defaulting to cash and often remain disengaged from the topics of saving and investing indicates many are in danger of sleepwalking into financial straits later in life.
Our survey found funding a comfortable retirement is the top priority for more than two-thirds of people in the UK. Yet nearly half of those we interviewed in the UK admitted they have not begun to save specifically for their retirement, while nearly two-thirds are not confident they will achieve the income to fund their desired retirement lifestyle.
People think they will need an annual household income of £27,000 to fully enjoy their retirement yet this is almost twice the current average income received by pensioners, according to the most recent data available from the Office for National Statistics. Furthermore, to achieve this level of income, people think they will need to have accumulated a pension ‘pot’ of £259,000.
While annuities are no longer the default option for retirees, they still act as a useful reference point for calculating the pension pot people will need. Based on current annuity rates, that pot of savings would need to be closer to £525,000 to guarantee a flat rate of £27,000 a year throughout a person’s retirement. However, inflation means £27,000 in today’s terms will be worth far less in 10 or 20 years’ time.
The simple truth is that people need to be doing more now for their future. Whatever a client’s aspirations, the need to rebuild the savings and investment habit is clear. People need to reassess their long-term financial goals and realign their habits to meet them.
With interest rates at historical lows and inflation eroding the real value of all investments, sitting in cash may not enable your clients to meet their long-term goals. For those clients who are ready to take steps back to the markets, multi-asset funds are designed to offer diversified solutions that spread the investment risk across a wide range of assets at home and abroad
With this in mind, Blackrock developed the Consensus range of five independently risk-rated, core asset allocation portfolios, investing in index funds within the group’s collective investment funds range. By using the this range of efficient and transparent ‘building blocks’, with an asset allocation overlay from the group’s highly experienced index asset allocation team, we believe we have created a robust solution that can weather a variety of market environments.
Catering to a range of risk appetites, the Consensus funds offer advisers and their clients simple, transparent and cost-effective investment solutions. Each of the five funds has a different investment exposure to shares, bonds and other asset types as well as an independent risk-rating. These risk ratings are designed to help advisers to work with investors to select the fund that most closely meets their investment objectives and attitude to risk.
Blackrock’s Consensus funds seek to achieve a total return by investing in index funds managed by the group – in other words, they are ‘funds of index funds’. However, while the funds use index building blocks, they are not themselves traditional index-tracking portfolios.
This is because the investment strategy is based on broadly matching the asset allocation of the relevant industry sector average – as represented by the Association of British Insurers’ pension sector averages – rather than aiming to track a benchmark based on market capitalisation. The quality and range of the underlying index fund building blocks is important to being able to explore a breadth of equity and fixed income asset classes. This allows the manager to target desired fund exposures in a precise, liquid and cost-effective way
The Consensus funds are managed by Blackrock’s Beta Strategies team. The index asset allocation team within this group monitors the funds on a daily basis, implementing positions and allocating assets between different sectors of the market on a monthly basis through investment in the Blackrock Collective Investment Funds range.
The five funds and their underlying building blocks are also subject to rigorous independent oversight and analysis from a dedicated risk team within Blackrock. This team partners with the portfolio managers to ensure delivery of consistent and scalable solutions that meet our clients’ needs
The Consensus range been developed as BlackRock’s core RDR-friendly solution for financial advisers and investors. The industry needs simple core asset allocation solutions that can be easily classified from a risk-return perspective and applied to a range of client objectives and the BlackRock Consensus Funds allow advisers to implement portfolios for their clients, quickly and efficiently.
The BlackRock Investor Pulse survey is one of the largest global surveys of its kind. In conjunction with leading financial services research group Cicero, BlackRock conducted a research study during September 2013 of 17,600 people aged between 25 and 74 across 12 countries – the UK, the US, Canada, Germany, France, Italy, Belgium, Netherlands, Switzerland, Taiwan, Hong Kong and Australia. The aim of the survey is to provide deeper insights into how today’s savers and investors are prioritising their personal finances in order to achieve their hopes and aspirations for the future.
|Matching clients’ attitudes to risk
|Supported by lessons from the BlackRock Investor Pulse Survey, we have identified five profiles that could help match your clients’ attitudes to risk to a particular Consensus fund. You may recognise several familiar faces among them. For more information on the Consensus fund range, click here
|| Investor Pulse profile
||Investor Pulse findings
||Fund to consider
||Safe Saver – Cash is king, very low appetite for risk
||70% claim building their pension pot is their top priority, but may be unaware of the effect of inflation on their savings
||Black Rock Consensus 35 Fund
||Cautious Investor – Careful with their money and tend to have more savings in cash
||53% quote preserving their wealth as their top priority, but only 20% are willing to take on more risk to maintain purchasing power
||BlackRock Consensus 60 Fund
||Opportunity Seeker – Tend to be investors already
||Around 50% currently feel comfortable investing in the stockmarket but could be doing more to grow their long-term wealth
||BlackRock Consensus 70 Fund
||Confident Investor – Usually have a greater understanding of markets and investing
||75% are comfortable investing in markets. May be receptive to diversifying to gain broader market exposure
||BlackRock Consensus 85 Fund
||Adventurer – Willing to take on more risk in search of higher returns
||73% are happily investing in stocks and shares, with almost 9 out of 10 confident in their money-making decisions
||BlackRock Consensus 100 Fund