Drawdown needs to prove its pudding – as annuities do (PP coffee morning)


Those who missed yesterday’s Pension PlayPen coffee morning can now relive an excellent hour with our catch up service. You can watch a number of recent coffee mornings by logging into http://www.pensionplaypen.com and pressing the media tab. But for those of you kind enough to read my blog , here is a special treat!

Despite being under the weather, Mark Ormston delivered a precise but interesting conceit that likened the purchasing of an annuity to that of a little black dress – the features of the annuity to the accessories that make the little black dress that little bit more “you”.

Annuities can currently be purchased at rates that we may look back on with wonder. If you see the current increase in interest rates as a spike, then the argument’s that you’re buying today at the top- but let that not be deemed advice, many mountains have false summits.

But the great thing about annuities is that you can see the results of what you are buying.

Can drawdown show you what you’re buying?

What followed was a presentation from Steve Thomas (backed up by Andrew Clare) on how the risks of drawdown can be reduced through investment strategy. Their contention is that those using drawdown are looking for the wrong things (low volatility returns) when what they should really be worried about is the maximum drawdown against the fund – something that could nip  the future of drawdown in its bud.

The outcome of 20 years of academic research is a fund which is offered to financial advisers on all the usual IFA platforms. You can look at it here.


Clearly the fund hasn’t always been 80% in cash , but it is right now and that seems odd when we’ve been told that the best protection against inflation is to invest in equities.

Alpha Beta – the fund managers – have done some back testing to see how the fund would have performed since the turn of the century

But this isn’t really too helpful. What Steve Thomas and Andrew Thomas are arguing is that their approach (the yellow line) would have allowed people investing over this time to draw a regular income from the fund and find themselves taking more for longer than were they invested in another fund (the blue line for instance).

There is a little actual performance to look at


To put it another way, modelling the capital returned over time without taking into account the drawdowns is like buying a 4 by 4 and never taking it off the road. The point of a drawdown fund is to provide drawdown, not build up capital.

Thomas and Clare’s secret formula (algorithm) is described as a “trend following filter”

But re-reading the points , I am struck that today’s trend pointing filter has led to our putting our investment in cash, and paying the fund manager a minimum of 0.4%, a current portfolio cost of  0.51% and potentially a lot more when the trend pointing filter indicates a return to equities.

What the punter wants to know is what would have happened to his/her/their money in terms of regular payments and remaining capital if it had been invested in various times since 2000 (see above).

So my challenge to Steve and Andrew and the people who manage funds at AlphaBeta Partners is for you to road test your fund against a simulated set of drawdown histories based on the FCA’s retirement income tables (for non-advised) and/or actual advisor data on what people have actually drawn down over the period.

Not only can this be done, but I know how to do it.  You can model any number of scenarios based on what matters most – member outcomes! I’ll show you how.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , . Bookmark the permalink.

Leave a Reply