Reading between the lines of Lipper’s latest fund trends data, income is again a top priority with bond funds continuing to see strong demand, alongside encouraging sales for commodities and property.
The question is with base rates so low, what today constitutes an acceptable income and how on earth can it be maintained?
For Toby Ricketts, chief executive officer at Margetts Fund Management, anybody expecting yield above 4% is being overly optimistic.
Risky business
“There are still a lot of people targeting 5% income because that’s what it used to be, but to do that you are going to be taking a lot of risk,” he remarks.
“You may well be converting capital to income, which in a client’s hands is poor because the income is often taxable and the capital loss can’t be offset. You shouldn’t take risks with income portfolios because excessive volatility is likely the last thing that these investors need.”
For Ricketts the best sources of income at present are short-dated corporate bonds and equities, with his Providence Strategy generating around 3%.
“Historically that is a low yield, but against cash if we are yielding 3% and maintaining the capital value, or possibly growing it, and giving 6x the current interest rate on cash we don’t feel short of income."
A broader set
For Eugene Philalithis, co-manager of Fidelity Multi Asset Income Fund, now is the time for yield seekers to be considering the merits of broader set of assets, including property, infrastructure and floating-rate secured loans. As at the end of April, the fund had a net allocation figure to equities of just 20%.
“While alternative asset classes should not be viewed as standalone replacements for traditional income-generating assets, they could play an important role in an overall income portfolio,” he says, adding that they can add precious diversification with different yield, liquidity, volatility, and inflation protection characteristics.
Still, with a historic yield of 2.7% a fund like this on its own may still not be enough to satisfy income-hungry investors.
In the July issue of Portfolio Adviser we will be exploring these individual asset classes in more detail to answer the enduring question of where can we get a reliable income? Let us know your thoughts.
