THIS DOCUMENT IS FOR PROFESSIONAL ADVISERS ONLY. GENERATION PORTFOLIOS THE PURPOSE-BUILT DECUMULATION SOLUTION. Generation

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1 THIS DOCUMENT IS FOR PROFESSIONAL ADVISERS ONLY. GENERATION PORTFOLIOS THE PURPOSE-BUILT DECUMULATION SOLUTION Generation

2 The Generation portfolios have been specifically designed for clients who seek to decumulate assets in retirement. In this brochure, we explain why an approach very different to accumulation solutions is necessary to meet their needs: the approach taken by Generation.

3 DIFFICULTIES IN DECUMULATION INFLATION RISK It can be hard for clients to grasp the impact that inflation has on their wealth over the long term, as it eats into their savings gradually. At an inflation rate of just 3%, they would lose over a quarter of their purchasing power in just ten years and almost half over twenty. People s purchasing habits also change as they grow older; for example, they typically spend a higher proportion of their total income on essentials such as heating. These effects mean achieving returns above inflation is essential to preserving clients living standards in retirement. LONGEVITY RISK We know we are living longer than ever, but many people underestimate how fast life expectancy is increasing. Over the past hundred years, life expectancy has increased by about three years a decade, figures from the Office for National Statistics show*. CAPITAL PRESERVATION 120k 100k 80k 60k 40k 20k Equity Portfolio Bottom 10 months 1/3rd mitigated Bottom 5 months 1/3rd mitigated The chart 1 above highlights the importance of utilising a strategy designed specifically for decumulation. The orange line shows an equity portfolio that remains invested in the market, come what may, much like many accumulation strategies; following stock-market declines and regular withdrawals, its capital is nearly depleted after 15 years. The other two lines show the impact on the same portfolio if the worst five and 10 months of performance are mitigated by a third leaving clients with a significantly greater amount of capital at the end of the period. For males, life expectancy at birth increased from 51 years in to 79 years in ; for females, it increased from 55 to 83. This creates a danger that clients spend their retirement savings too quickly, leaving them poorer in later life. As such, it is crucial to help them use their retirement savings to generate sustainable income. 1 For illustrative purposes only. Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. 100k hypothetical portfolio entering an income drawdown arrangement in % p.a. withdrawal, escalating by 2.5% (annualised), monthly withdrawals. Periods incorporating a whole range of equity market conditions. Equity market as defined by MSCI AC World Index. * englishlifetablesno17/ Generation portfolios 1

4 SEQUENCE OF RETURNS OR POUND-COST RAVAGING A negative sequence of market returns early in retirement can shrink clients savings to the point where what once appeared an achievable level of income can soon become unattainable even if markets catch up later on. Withdrawing income from investments in a falling market essentially leads to pound-cost averaging in reverse: clients are forced to sell units in their portfolios when prices are declining in order to pay for their desired level of income. This also means that when markets rise again, clients will hold fewer units and be less well-placed to benefit from the rebound. Doing the utmost to avoid such a negative sequence of returns, therefore, should be at the core of a decumulation strategy. Another way of viewing this is to see accumulation as focusing on destination risk, whereby reaching retirement with the largest possible pot of savings is paramount; and decumulation as centred on journey risk, whereby the avoidance of a negative sequence of returns becomes more important. 2 Old Mutual Global Investors

5 THE SOLUTION The Generation portfolios seek to tackle these challenges head-on. To curb the impact of inflation, the range targets returns after fund charges above the consumer price index of either +3%, +4% or +5% over the medium term, depending on the portfolio. Alongside the portfolios aim of helping to create an asset base from which a sustainable source of income can be drawn, this goes some way towards dealing with the risks posed by longevity. And to cut the chances of a negative sequence of returns, there is a strong focus on short-term risk management. We have designed Generation in collaboration with advisers, following the introduction of the new pensions freedoms, to offer a flexible and bespoke solution for retirement. The portfolios are aimed at retirees who may not want to buy an annuity or would like a solution that allows them to remain invested at the same time as having an annuity, or would like to keep the option open to buying an annuity in the future. CPI +3% GENERATION TARGET 3 CPI +5% GENERATION TARGET 5 CPI +4% GENERATION TARGET 4 Designed for clients wishing to take income Capital-preservation at its core Engineered to mitigate sequence of returns risk Generation portfolios 3

6 HOW DO THE PORTFOLIOS WORK? It is probably fair to say that the same meal would taste significantly better if an expert chef were to prepare it instead of a novice cook, as the chef would probably use a wider range of ingredients and follow their own recipe. The same is true of the Generation portfolios, which are constructed from a broader set of investments than many other multi-asset funds and are designed specifically for at-retirement clients. Alternatives Alternative income Commodities Private equity Property Cash Fixed Income Government Inflation linked Supra and agency Corporate (investment grade) Corporate (sub-investment grade) External/hard currency emerging market debt (EMD) Local currency EMD Convertibles (investment grade) Convertibles (sub-investment grade) Equity Asia Pacific ex-japan Emerging Asia Europe ex-uk Japan UK US Europe, Middle East and Africa Latin America Portfolio asset allocations are for illustrative purposes only. 4 Old Mutual Global Investors

7 CAPITAL PRESERVATION DIFFERENT STARTING POINT We create asset allocations to help meet the income needs of retirees; we then apply stochastic modelling, to create robust portfolios with respect to market drawdown, based on expected future asset-class characteristics. As such, at the very outset the portfolios are positioned to avoid as many things as possible that could diminish clients capital in the short term, such as sudden downturns in equity markets. WIDER DIVERSIFICATION The Generation funds are unfettered, best of breed multi-asset portfolios, which means the managers scour the globe for the best funds and investments across all types of assets. As a result, they can gain from the expertise and judgement of other specialists worldwide. But they also hold alternative assets such as economic infrastructure debt that should help spread risk and lower the impact of volatility by being less correlated to broader markets.! YIELD ASSETS Among the mix of securities targeted, there is a focus on natural yield assets, which help cushion performance and deliver the targeted total return. Each portfolio contains a sleeve of directly held equities, which have a bias towards diversified sources of income and solid enterprises with attractive yields. There is also a broader emphasis on the execution of investments, as well as the leveraging of the expertise of OMGI s highly regarded UK and European stock-pickers. MANAGING THE INVESTMENT JOURNEY The Generation portfolios have been engineered to avoid losing clients capital, whereas many accumulation strategies are constructed to win as much market upside as possible without too much concern about the downside. As such, there is a persistent focus on mitigating the risk of losses and watching out for near-term catalysts to manage retirees investment journeys. There is, therefore, a strong focus on acting tactically to achieve capitalpreservation, in which the 26-strong multiasset team, its quantitative analysts and proprietary investment tools play a key role (for more, see the booklet on the team s investment tools). Generation portfolios 5

8 THE INVESTMENT TEAM Old Mutual Wealth s investment division is deeply experienced in multi-asset investing, with one of the largest and most experienced multiasset capabilities in the UK and a history of innovation in creating solutions to meet investors needs. PAUL CRAIG PORTFOLIO MANAGER ANTHONY GILLHAM PORTFOLIO MANAGER Paul is manager of the Cirilium multi-asset portfolios and a member of the multi-asset unit at Old Mutual Wealth s investment division. He joined in December 2014 from Henderson Global Investors, following Old Mutual Global Investors acquisition of Cirilium. Paul has managed the Cirilium portfolios since 2009, taking on these responsibilities shortly after the inception of the range. Anthony is co-investment director of the multi-asset unit at Old Mutual Wealth s investment division and joined Old Mutual in In 2007, Anthony became a global bond portfolio manager having been a fixed income research analyst since Prior to focusing on fixed income, Anthony s areas of coverage included multi-asset, Nordic equities and quantitative US equity and fixed income research. Anthony is a CFA charterholder and has over 15 years of investment experience. Anthony and Paul are supported by the investment fund research team at Old Mutual Wealth s investment division; the multi-asset unit s other portfolio managers; and a team of quantitative analysts who help curate the array of investment tools and models used in running the Generation portfolios. 6 Old Mutual Global Investors

9 TEAM RESOURCES THE FUND RESEARCH TEAM The investment fund research team at Old Mutual Wealth s investment division performs two crucial tasks: finding the best managers and monitoring those with whom the division has already entrusted its clients money. The eight-strong team of analysts is based at the London offices of Quilter Cheviot and headed by Nick Wood, who has more than 19 years experience in the financial services industry. On average, the team members have 14 years of industry experience. Having such an extensive background, with a wide network of industry contacts, helps the team to conduct in-depth due diligence. Coverage of geographic regions and asset classes is divided among the analysts, enabling the team to field specialists across equities, fixed income and alternatives. The team scours the globe for the best managers available, casting its net as wide as possible and looking at funds from across the entire market. Before approving a new investment, an exhaustive research process is undertaken, involving face-to-face meetings and extensive analysis of the fund s underlying investment philosophy and performance. THE QUANT TEAM The portfolio managers place a strong emphasis on tools and financial modelling work, to help achieve Generation s objectives. To this end, they are supported by a four-strong team of quantitative analysts, whose primary role is to curate and enhance the models and tools developed in collaboration with the multi-asset team to run its funds. The team is led by Leif Cussen of OMGI, who is a computer programmer and systems engineer. It is responsible for the maintenance of these tools and models, which includes making sure processes are working, driving new ideas and working with the portfolio managers to ensure they are easy to use. Each member brings with them specific skills; as a unit, they are adept at managing data, designing robust systems and engaging with data providers such as FactSet and Bloomberg. THE INVESTMENT TOOLS As mentioned earlier, the portfolio managers deploy an array of investment tools and models. These are used at every stage in the investment process from determining and stress-testing strategic asset allocations process, to inferring what investors are factoring into bond markets about the outlook for interest rates, to scouring the world for company shares that offer the most value. One such tool worth highlighting is called Wingman, and was developed by Lee Freeman-Shor, a portfolio manager in the multi-asset unit at OMGI, according to the investment philosophy outlined in his book The Art of Execution. The tool analyses portfolio holdings and triggers action when a position is turning sour; for example, when a stock held is materially down. Lee s research suggests that inaction is far worse than action under these circumstances that winners adapt, either by doubling-up or exiting the position. Wingman identifies such situations, and issues a call to action. Generation portfolios 7

10 NOTES 8 Old Mutual Global Investors

11 IMPORTANT INFORMATION Please remember that past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Exchange rates may cause the value of overseas investments to rise or fall. This communication provides information relating to a fund known as Old Mutual Generation Funds (the Fund ). This communication is issued by Old Mutual Global Investors (UK) Limited (trading name Old Mutual Global Investors), a member of the Old Mutual Group. Old Mutual Global Investors is registered in England and Wales under number and its registered office is 2 Lambeth Hill London EC4P 4WR. Old Mutual Global Investors is authorised and regulated by the Financial Conduct Authority ( FCA ) with FCA register number and is owned by Old Mutual Plc, a public limited company limited by shares, incorporated in England and Wales under registered number The Fund is also regulated by the FCA and therefore Old Mutual Global Investors may promote the Fund to the public. This communication has been prepared for general information only. It does not purport to be all-inclusive or contain all of the information which a proposed investor may require in order to make a decision as to whether to invest in the Fund. Nothing in this document constitutes a recommendation suitable or appropriate to a recipient s individual circumstances or otherwise constitutes a personal recommendation. No investment decisions should be made without first reviewing the prospectus and the key investor information document of the Fund which can be obtained from The Fund may invest principally in units in collective investment schemes. OMGI 06/16/0326 Generation portfolios 9

12 INVESTING FOR RETIREMENT INCOME Generation