Hounslow commits £100m to multi-asset income

Earlier this month, experts suggested multi-asset income products could rise in popularity as the liability profiles of defined benefit schemes shift towards negative cash flow.

The £805m fund appointed Fidelity International to manage the mandate. It has a 4 per cent annual minimum yield requirement and scope to invest across equities, fixed income and alternatives. Its purview can also extend to investment growth.

Lorelei Watson, head of treasury, pensions and capital at Hounslow Council, said the scheme was becoming cash flow negative before investment income was taken into account.

Watson said it was undecided whether the mandate would be run as a segregated mandate. The scheme is also still considering further changes to its investment strategy in response to the shift.

Multi-asset appeal

Simon Cohen, head of investment advisory at consultancy Spence & Partners, said multi-asset credit was gaining popularity among investment consultants.

“People see it as doing both growth and also income,” he said.

Multi-asset income, such as that being used by Hounslow, is an increasingly diversified form of multi-asset, he said, targeting “anything that pays income” rather than credit in particular.

“Those types of low-volatility income strategies are likely to become more appropriate,” he said.

Potentially volatile asset classes such as equities can be problematic as a source of income. Cohen said this was demonstrated by the aftermath of the EU referendum vote, with many investors believing UK-listed companies will cut their dividends.

“The issue with something like equities is there’s no guarantee that income will continue, we’ve already seen mining stocks cutting back on dividends,” he said. “The best thing to do is have contractual income that can’t be cut back, like infrastructure.”

He added: “The issue with growth assets is you don’t want to have to be selling something that’s volatile [when it is low].”

Andrew Parker, director at independent trustee company Law Debenture, said multi-asset was increasingly appealing to trustee boards as a diversifier.

“Multi-asset is something boards are exploring because it gives them diversity outside more conventional asset classes,” he said. “I think there’s a move for trustees to protect what they’ve got through liability-driven investment, then seeking new sources of return through multi-asset, infrastructure [and] property.”

LDI attempts to match investments to the liabilities of a scheme, ensuring it has sufficient assets when its obligations are due. They have been increasingly important in recent years, with the most recent LDI report from consultancy KPMG showing £741bn of liabilities hedged in 2015, up £83bn from the year before.

Parker said multi-asset sits alongside this as a way to “spread the pressure on your return-seeking assets”.