Comparative Risk Levels

AlanP_2

Looking at options within a Standard Life AVC provided alongside DB scheme (LGPS). Want to move out of current 100% equity choice. Has all been contributed with the benefit of 40% tax relief and has had increased as you would expect for 100% equity. now looking to "protect" some of those tax & growth gains as the target retirement date gets a bit closer.

As it can be taken as the tax free Lump Sum at time of starting DB we are looking at the Lump Sum Profiles that slowly move into Money Market funds at selected retirement date.

Have decided that one of these 3 will be the choice, but am unsure how to compare relative risk due to the inclusion of SL Global Absolute Return Strategies in 2 of the 3.

There are 5 risk levels within each range so for illustration I am showing level 4 in each case, with the same target retirement date. The percentages are what it would be invested in now (5 years until target date).



MyFolio Market Plus - Passive Trackers for Equity, some Trackers & some Active for Bonds, Active for Property.

Equity - 51.35%
Bonds - 37.6%
Property - 5.85%
Money Market - 0.00%
Cash / Other - 5.20% (could well be MM)
Abs Return - 0.00

Passive Plus - Vanguard trackers, Active for Property

Equity - 37.5%
Bonds - 41.05%
Property - 4.1%
Money Market - 6.35%
Cash / Other - 0.00%
Abs Return - 11.0%

Active Plus - SL active funds

Equity 41.55%
Bonds - 37.6%
Property - 3.35%
Money Market - 6.45%
Cash / Other - 0.00%
Abs Return - 11.05%


So, what are your thoughts on relative risks and Abs Return element in particular.

I am sssuming that there is a equity drop of 20%+ sometime in the next 5 years and that Bonds will lose an amount of capital as interest rates creep up.

Malthusian

I don't think there's really much in it. Either way you are gong to switch around 40% of your holdings from equities into bonds all at once, and then everything gradually into bonds and cash as time passes.

The Absolute Return part is a black box from your perspective. It may preserve your capital when markets are falling or lose you money when markets are rising. Take a look at the list of holdings (or "strategies") on the bottom of the first page of the factsheet. If anyone can provide a meaningful analysis of how risky the fund is they're doing better than me. But it is only 11% of the portfolio so is unlikely to ruin you.

I'm a bit confused by how "Passive Plus" can be Vanguard trackers and active management for property only when 11% is absolute return. Absolute return is almost by definition active management. Vanguard has absolute return funds but they're not trackers.

AlanP_2

Malthusian wrote: »

I don't think there's really much in it. Either way you are gong to switch around 40% of your holdings from equities into bonds all at once, and then everything gradually into bonds and cash as time passes.

The Absolute Return part is a black box from your perspective. It may preserve your capital when markets are falling or lose you money when markets are rising. Take a look at the list of holdings (or "strategies") on the bottom of the first page of the factsheet. If anyone can provide a meaningful analysis of how risky the fund is they're doing better than me. But it is only 11% of the portfolio so is unlikely to ruin you.

I'm a bit confused by how "Passive Plus" can be Vanguard trackers and active management for property only when 11% is absolute return. Absolute return is almost by definition active management. Vanguard has absolute return funds but they're not trackers.

Thanks Malthusian.

I knew Abs Return was Active but forgot to highlight it, my mistake.

Your analysis aligns with my own, it is a bit of a Black Box. I had looked at the strategies and couldn't put a "rating" on them, heads they win, tails they might win essentially.

On the plus side at least they are making an active choice based on how they see the world and can switch approaches as conditions change which feels better in this situation where preservation as opposed to all out growth is the underlying objective.

Linton

Most Abs Return funds weren't around at the time of the 2008/2009 crash and so it is difficult to judge their effectiveness under difficult market conditions. Looking at the graphs of randomly selected funds some show surprising volatility, However there are some which have done their job moderately well over more than 10 years. I personally am slightly doubtful of Abs Return's value in a portfolio as they seem rather a compromise possibly not providing the stability one may want yet showing a significant performance hit compared with equity.

SL's Global Abs Return fund dropped around 10% in 2009 recovering quickly , rose to a maximum in spring 2015 but is now still a few % below that value. Its mandate is cash +5% over a rolling 3 year period which it may struggle to achieve in the new few months.

Are you using these funds to pay for early retirement or will you be relying on the DB pension?

AlanP_2

It is linked to DB so will be taken as lump sum at point DB is started, earliest 62/63 so 5/6 years time.

Outline plan is to use SIPP pots if we want to chuck it all in before then.