15 April 2015

On April 6 your hollers could be heard across the Atlantic. At first, I thought the royal baby had come early. Then it dawned on me: it’s Freedom Day. Brits no longer have to buy annuities.

For some investors, this day has been a long time coming. They know annuities offer income for life but at costs to their capital. To others, the new pension rules bring added pressure. After saving sensibly they must now decide how to replace their salary in their golden years.

Lessons from the States

In the US, where I’m based, we’ve lived with pension freedom since 401ks were introduced in the 1970s. They let us pick one of five routes, including opting for an annuity, taking a lump-sum or leaving money parked in our plan, usually for a limited time.

While these regulations have been in place for nearly 40 years (give or take the odd tweak to the fine print), it’s fair to say investors still approach these decisions with the same trepidation I sense in the UK.

Most seem to rely on private pensions while about a quarter try in vain to get income from cash1. Others turn to investments and seek financial advice1. From what advisers tell me, they ask where they can find a decent, sustainable income that doesn’t involve excessive risk.

Confront the income dilemma

Some investors in the UK will no doubt share this question. It will be tough to advise on, but I believe diversification could help.

Along with Michael Fredericks, Alex Shingler and a team of 170 multi-asset experts2, I’ve found broad diversification – among stocks, bonds and less traditional investments such as covered calls – offers great potential for income that’s more consistent than any one asset class and less risky than a balanced portfolio3.

It’s the approach we take in our recently-launched BlackRock Global Multi Asset Income Fund and its sister fund offshore. Since the offshore fund’s inception nearly three years ago, it has delivered an average annual income of 5.5%2. We hope to offer a similar yield on our new fund and that’s why I’ve highlighted these numbers. There are some differences in asset allocation and investment selection, so the actual performance of the funds could differ.

Know when to invest and when not to

On both funds we devote a lot of time to understanding when to invest and when to hold back because nowadays you have to cast the net much wider to find an attractive income. To us, this is time well spent. We like to know what we’re getting into – and the risks – up front.

Advisers tell me clients are often either reluctant to take risk and hold lots of cash or are so eager for income they ignore threats to their capital. Both types of client can end up with the same outcome: their nest eggs aren’t what they’d hoped.

We don’t chase yield at any cost and that means the BlackRock Global Multi Asset Income Fund could help your clients at or approaching retirement and looking to cut risk compared to equities.

Consider it too for investors after more income potential than they get from government bonds, or if they are heavily-exposed to high yield debt.

 

Sources:

1 BlackRock Investor Pulse.  The survey was conducted globally in August and September 2013 by Cicero Group, an independent research group. 4,000 people responded in the United States and here we have highlighted responses of 692 individuals who are fully retired.
2 BlackRock, as at 31 December 2014.
3 This is the performance of the BGF Global Multi-Asset Income Fund, a $1.5 billion Luxembourg-domiciled UCITS fund. The performance of the BGF Global Multi-Asset Income Fund is included for illustrative purposes only, as the fund employs a similar investment strategy and was launched in June 2012. The inclusion of this material is presented by way of example only and is included to demonstrate the potential of the investment strategy to be employed by the BlackRock Global Multi Asset Income Fund. However please note that the actual asset allocation and investment selection of these funds could differ which in turn could lead to differences in their performance. Fund launch date 28 June 2012. Average of all A6 share class monthly dividends annualised since Fund inception. A balanced portfolio is one comprising 50% equities and 50% bonds. The BGF Fund’s risk has been below this reference level, based on data sourced from Bloomberg, from 1 Nov 2013 to 31 January 2015. Based on Bloomberg 30 day volatility calculations of accumulating share classes net of fees (BGF GMAI: A2 USD). Specifically, the reference risk benchmark comprises: 50% MSCI World/.50% Barclays Capital Global Aggregate Bond Index USD Hedged. Maximum drawdown of BGF GMAI: A2 USD, net, Global equities: MSCI World, Global Bonds: Barclays Capital Global Aggregate Bond Index USD Hedged. Max drawdown measured from peak to trough from 1 Nov 2013 to 28 February 2015.

Disclaimers:

This material is for distribution to Professional Clients and should not be relied upon by any other persons. Unless indicated the fund information displayed only provides summary information. Investment should be made on the basis of the relevant booklet together with the Prospectus and Key Investor Information Document (KIID), which are available from the Manager, and particular attention should be paid to the Fund Specific risks, which are detailed in full in the KIID. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

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In the US, where I’m based, we’ve lived with pension freedom since 401ks were introduced in the 1970s.