A Discounted Gift Trust (DGT) plays to the tune of those clients looking to preserve their wealth for inheritance and take an income. The question, especially now given the unprecedented challenges we are facing with covid-19, is where to invest. Like many other investment solutions, this will depend on what the investors' objectives are; for example, high income or wealth preservation. For this write-up, let's zoom in on a client looking for wealth preservation and a relatively small income of 4%.
To start, when it comes to wealth preservation, the focus lies less with the upside and more on how to manage potential downside risks both in terms of depth and duration. For instance, the client first might be inclined to invest in fixed income, which is traditionally considered the lowest risk asset class after cash. Anyone doing this with a need for some income (even one of 4%) would have seen higher levels of drawdown compared with multi-asset investments. The unceasing demand for multi-asset, in this respect, becomes clear since investing in multiple asset classes provides lower correlation than being invested in one and that helps to reduce drawdown, which is very important for preserving wealth.
Source Morningstar Direct. Data as at 31/03/2020
It is also worth noting that when we have seen levels of drawdown increase across the 0-35% shares sector over the past decade, it was often because the fund was venturing into riskier assets to reap the same level of returns seen in the previous ten years. This is why we believe it makes sense for such clients to look at funds specifically designed for lower risk appetites rather than at more generic funds; for example, the 0-35% shares sector, which is widely perceived as the least risky within the IA mixed investment sectors. Simply put, any client looking for a ‘sustainable' withdrawal rate is likely to have more success with a designated low risk level fund because it has the potential to be much more reliable for reducing drawdown risk and therefore could be extra helpful at preserving wealth whilst also taking an income.
Wealth preservation society
Let's take the example below. Mr Miggins invested in the returns of the IA 0-35% sector just before the global financial crisis (GFC) in 2008, while his wife, Mrs Miggins, invested in the composite of a risk Profile 3 as to better match her risk appetite. Each invested £700,000, taking 4% a year. Both funds worked well in terms of wealth preservation as of the end of March 2020. However, Mrs Miggins' investment in the composite risk profile not only provided greater returns and income over this period but also better drawdown, particularly during the GFC and the historical market disruption caused by covid-19.
|
Investor |
Mrs Miggins |
Mr Miggins |
|
Investment |
Composite Risk Profile 3* |
IA 0-35 Sector |
|
Initial Investment |
£700,000 |
£700,000 |
|
Income |
4% |
4% |
|
Total Income Earned |
£382,090 |
£328,807 |
|
Total Return after Income |
£824,528 |
£620,255 |
*Composite risk profile 3 based on the asset allocation of Dynamic Planner's risk profile 3 as at 31/03/2020
Source: Morningstar Direct to 31/03/2020
Managing downside risk within our Multi-Asset funds
During the recent equity correction our multi-asset team temporarily allowed the equity underweight in our portfolio funds to grow to 2-4% to help reduce downside risk caused by covid-19 volatility. Our team of fund managers believe that while the correction was of the right magnitude in value, the pace was too fast and that in time the lows may be revisited. Within that, they are wary of non-essential goods companies and are focusing on tech and other selective areas expected to outperform throughout the pandemic.
In fixed income, we believe corporate bonds remain the most attractive asset and continue to concentrate on high quality credits in non-cyclical sectors, mainly in Europe given the European Central Bank's ongoing purchasing programme. For example, as the sell-off unfolded throughout March, we were able to take on new positions in credits that had particularly suffered while still offering strong liquidity features to weather the crisis (e.g. large cash positions or potential government support). We will continue to look for companies that we feel are unfairly punished and provide attractive valuation opportunities.
More important than ever in our decision-making process are the consultations with our internal credit analysts as well as the wider fund management team at Canada Life Investments. Although social distancing means we are no longer in meeting rooms and these conversations take place via conference calls and videos, they have been vital in our current weightings and risk monitoring.
Important information
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document's accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
Data Source - © 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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