As investors’ quest for sustainable levels of income continues, advisers are taking a range of approaches to delivering income-generating portfolios.
Natural income stream
Tom Munro Financial Solutions favours multi-asset funds geared towards income generation and advocates taking the natural income from these.
“The new pension freedom rules reinforce the argument for income portfolios at the decumulation phase, but such portfolios are also increasingly being used to good effect for general income requirements, not just pension income,” says Tom Munro, director of his eponymous Falkirk-based firm.
“A natural income solution backed up with sound cash-flow projections is preferable for capital preservation because it avoids well-documented issues surrounding taking a fixed percentage income.
“In adverse market conditions, the loss of capital can seriously impact a client’s long-term financial planning and this argument becomes more powerful with an expected market correction looming and undue shocks that may follow.”
Munro uses a matrix of four income fund ranges, selected and monitored by an investment committee and Rayner Spencer Mills, and designed to suit clients looking for diversity of income sources though an actively managed, multi-asset portfolio, rather than a single equity income fund solution.
“This makes mapping from risk profiling to suitable portfolios relatively straightforward. We have every style of management available and whatever outcome is most suited to a client’s needs the matrix will provide a solution.”
The funds are monitored initially on a monthly basis for six months and then on a quarterly basis.
One range that forms part of the matrix is the Janus Henderson Core Multi-Asset Solutions range – four lower cost multi-asset portfolios, each with an income bias. The funds are risk targeted and managed to defined volatility targets set by Distribution Technology, the risk-profiling firm.
|Yields on Henderson Core Multi-Asset Solutions range|
|Henderson Core 3 Income Fund ||3.50%|
|Henderson Core 4 Income Fund||3.90%|
|Henderson Core 5 Income Fund||4.10%|
|Henderson Core 6 Income & Growth Fund||4%|
Source: Janus Henderson Investors, historical yield on I Inc share class 30 November 2017. Yields may vary and are not guaranteed.
Equity income focus
When Ian Head started his business, Berkshire-based Fund Management, in 2008, he spent a lot of time thinking about asset allocation, and also how best to serve the needs of clients who need income.
“Starting with a clean sheet of paper gave me the chance to look at this subject with fresh eyes, and whilst in many ways you could call my approach boring, I did come to an important conclusion – that equity growth and equity income could be treated as two separate asset classes for the purpose of building a portfolio,” he says.
“We all know that income-producing assets and funds tend be more resilient in a falling stock market, but can lag behind in a recovery or bull market. As we ‘climb the wall of worry’ to the very top of the equity markets, it’s hard to see much capital growth in the near future, and so allocating more to funds that produce a decent dividend can give my clients a positive return in a flattish market and perhaps a softer landing in a bear market.
“Of course, if we have a continued bull run, my clients will miss out on some of it, but most of my clients quite like their performance to be ‘boring’!” Over the past two years, Head has reduced clients’ exposure to bonds amid fears over a bubble in fixed income markets and added to UK equity income funds. A typical balanced client today has 41 per cent in equity income, up from 33 per cent in January 2015, and 15 per cent in equity growth.
Source: Fund Management 15 November 2017
Holding portfolios on a platform enables advisers to harness the power of technology to manage income requirements, as Brian Bradley, a chartered financial planner at Clarke & Partners, of Dorset, has discovered.
“Roll everything up and agree a level of income from the portfolio made up mainly of income funds; these work best because they provide a good starting level of income and tend to be more stable than growth funds,” he says.
“Then encash across the board to meet the monthly figure which can be a combination of income and growth. Almost certainly this will involve an element of growth if income is much in excess of 4 per cent.
“It sounds complicated, but it’s actually pretty straightforward with modern computers.”
If the portfolio is comprised of investments held within ISAs, then potential tax liability does not come into the discussion, but otherwise there are tax advantages too.
“Capital gains tax is hardly likely to raise its head because any encashments that come from capital growth are unlikely to exceed the annual allowance; this can be a good thing since most people never make use of it.
“Keep a beady eye on the fund value and if this remains stable then the client has an income stream above the nominal yield of the portfolio with no damage to capital.
“This is of greater significance for pension drawdown where one can afford to nibble away at some of the capital as well without detriment and achieve a correspondingly higher level of income.”
|Big slice of natural yield||3.50%|
|Smaller slice from investment growth||1.50%|
Source: Clarke & Partners 15 November 2017
The views presented here are those of the advisers at the time of writing and are subject to change. Janus Henderson Investors is not responsible for the opinions expressed. Nothing in this article should be construed as advice. The article is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.
For additional information on topics related to income such as beating inflation, pension decumulation, and sequence risk, visit hgi.co/bbz2