Investment strategies for your pension

With Pensions Awareness Week upon us, investors may be looking at their own retirement pots and thinking – am I investing in a way that can help me secure the retirement I want?

The political and economic landscape complicates retirement planning further. After all, central banks are beginning to loosen monetary policy, and this shift in market landscape presents an opportunity to review your pension portfolio mix and consider potential investments for a declining rate environment, too.

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Below, I outline several strategies investors could consider.

The retirement dilemma

Today’s investors have a serious dilemma. Life expectancy has increased significantly over the last decade, with a person retiring at 65 expecting to live another 20 years or more. Investors, especially those with limited assets, may find it difficult to build a portfolio that provides a comfortable retirement without fear of running out of money, and being dependent on family or the state.

Investing for retirement generally has two stages: accumulation and drawdown. The good news is that typically, both can be accomplished using a balanced portfolio of mainly equities and bonds with a focus on income. At the accumulation (or growth) stage, investors usually reinvest dividends and income, and begin taking money out in the drawdown, or retirement stage.

interactive investor launched a new report – the ii SIPP Index – which does a deep-dive into some of these trends.

But first – a note on investing; specifically – investing rather than saving. History shows that investing your money delivers much better results vs holding cash over the longer time frame. Investing is a long-term game and is proven to be more reliable in delivering returns above inflation over the longer term. Certainly now, with inflation still running high and central banks starting to cut interest rates, it makes sense to favour investing over saving. This could mean a passive strategy using index trackers, or a more active approach.

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What’s the right portfolio mix for your pension?

Despite the challenges and limitations of investing for retirement, there's still a role for both equities and bonds in a balanced, well-diversified portfolio. It’s also wise to choose investments that could provide a regular income, as well as capital growth. When it comes to equities, adding steady dividend growth stocks should boost income and provide greater potential for capital growth and inflation protection over the longer term.

Bonds should offer the benefits of diversification away from equities, along with stable income and relatively low volatility, especially in periods of economic uncertainty.

Equities are considered riskier and can be volatile at times but can offer greater rewards. Cash and bonds tend to be safer investments, but typically provide more modest returns.

Remember - every investor is different. While it's generally recommended that pension investors should take on a more conservative investing approach as they near retirement, it will always depend on an individual's unique circumstances and tolerance for risk.

What key strategies are there to consider as an investor?

Equity income – focus on dividend growth

The current market environment presents significant opportunities to earn higher income from equities and bonds, and even cash. For example, with the Bank of England base rate at 5.00%, the yield on both the FTSE All-Share index and the 10-year gilt is just under 4%.

In contrast to bonds and cash, investing in equities offers the potential for income growth. Within equities, investors should take a more balanced approach to equity income, giving preference to global stocks with moderate but rising dividends and strong balance sheets, instead of purely high dividend payers.

These two interactive investor-rated equity income funds could be good options for a balanced portfolio. One is the Artemis Income fund, which aims to provide investors with a steady and growing income along with capital growth over the longer term. It mainly invests in UK companies but has the flexibility to invest overseas when attractive opportunities arise.

The portfolio is well diversified, typically owning 50 to 70 holdings which tend to be stable, well-established businesses with the financial strength to pay solid dividends to shareholders. The fund’s managers: Adrian Frost, Nick Shenton and Andy Marsh, have many years’ experiences managing income strategies. The fund provides a solid, core UK large-cap equity income exposure for investors, and the current yield is almost 4%.

Investors could also look at the Fidelity Global Dividend fund which aims to deliver both income and long-term capital growth, targeting yield at least 125% of that on the MSCI All Country World Index. The portfolio concentrates on high-quality mega cap companies in developed markets, investing across a variety of sectors and geographies, providing diversification.

The manager adopts a conservative strategy, focusing on companies with clear business models, healthy cash flows, and have minimal debt. Daniel Roberts has managed the fund since January 2012 and has support from Fidelity’s global team of around 130 research analysts. The current yield is almost 3%.

Bonds are back to being bonds

2024 has seen the beginnings of a return to negative stock/bond correlation, meaning bonds may once again play their role of strengthening diversification in a multi-asset portfolio. With inflation cooling and central banks starting to cut interest rates, investors could consider investing in short dated high-quality government and corporate bonds given the attractive yields offered.

As such, global and strategic bond funds may be best positioned to navigate the current environment. These funds have the flexibility to seek the best returns from across global markets and to move their asset allocation significantly, shifting exposure to government bonds, investment grade corporate bonds and high-yield bonds depending on the prevailing environment.

This interactive investor-rated strategic bond fund could be a good option for a balanced portfolio. The Jupiter Strategic Bond fund is a ‘go anywhere,’ high-conviction fund, meaning the managers are able to seek out the best opportunities within the fixed-interest universe on a global basis, while carefully managing downside risk.

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The team adopts macroeconomic investing and dynamic asset allocation by focusing on asset allocation, security selection, and duration management. The fund is managed by a highly experienced managers, Ariel Bezalel and Harry Richards, supported by the wider, well-resourced fixed income team at Jupiter.

Around 60% of the portfolio is invested in corporate and over 20% are in government bonds. The currently yield is over 5% and the fund has shown strong performance and resilience over the long term and provides an attractive yield. Given the fund’s flexibility and focus on downside protection, this makes it a strong core option for investors within a well-diversified portfolio.

Prepare for volatility

It is important to note that as we move into a more uncertain market environment with upcoming central banks meetings and the US elections in November, it makes sense for more investors to focus on capital preservation and limit volatility by maintaining a reasonable liquidity buffer within a well-diversified portfolio.

Investors could consider multi-asset funds such as Capital Gearing (LSE:CGT). The trust has two objectives: to preserve capital over any 12-month period, and to deliver returns well in excess of inflation over the longer term. It aims to achieve its investment objectives through a long-only, multi-asset portfolio of bonds, equities, and property, with small holdings in infrastructure, gold, and cash.

Rather than using exotic strategies or derivatives, the trust’s approach to avoiding drawdowns has been to hold a highly diversified portfolio of assets with some to be negatively correlated to risk assets. For these purposes, the team use index-linked government bonds as well as gold and safe haven currencies.

As such, the trust has a big emphasis on Index Linked Government Bonds, which account for around 50% of the portfolio. Such bonds offer protection when stock markets fall, as well as providing a shield against inflation. The trust has been managed by highly regarded investor Peter Spiller since 1982 and has been a great preserver of wealth in bear markets. This trust as a good fit as a core holding due to its defensive stance and high levels of diversification.

To summarise

Ultimately, your pension portfolio – much like your ISA portfolio – will benefit from staying diversified. So investors should keep in mind that whatever their investment goals, a well-diversified portfolio can help them spread the risk and reduce volatility and give the best possible chance of generating a positive outcome at retirement, whatever the market throws at us.