Macro events over the last decade have left investors struggling to find both growth and income as well as puzzling over how to receive a steady cash flow in retirement, according to F&C Investment’s Simon Cordery (pictured). 
The group’s head of investor relations and business development says finding investment vehicles to provide both desirable growth and income is one of the biggest issues facing the private investor today.
He explains that the search has been magnified as a result of an ageing population, earlier retirement on average and the replacement of earned income with investment income.
“Over the decade you’ve seen quite a big change in the rate of income return that lots of assets have provided,” he said.
Research from F&C shows income yields on most assets have fallen significantly – in 2000, base rates were 6 per cent and gross redemption yield (GRY) on 10-year gilts was approximately 5 per cent.
This is, of course, a far cry from what investors are able to get now, with interest rates remaining at 0.5 per cent for the sixth consecutive year and gilts currently yielding an average of 2.04 per cent.
“We’ve all talked about stock market booms and busts and crises and all that sort of thing, but I have never read an article that talked about the crash in interest rates – I think that’s probably been the biggest change since the new millennium,” Cordery explained.
“I think [2000] was an era when it was all about growth and dividends were for wimps and that sort of thing, and it was all about ploughing money back into the company that wasn’t making any money.”
“So what does the future hold? I think it’s quite clear to us that the interest rate cycle has reached a bottom. Whether it’s turned or not, only the next few months can tell. With the US perhaps raising interest rates by the end of this year, the UK will be following them not too much further along the line.”
What’s more, valuations have increased significantly in the UK. Despite the FTSE 100 index plummeting over the last couple of days as Greece’s debt crisis continued to deepen, the market has seen a total return of 61.06 per cent over five years. The FTSE All Share has comfortably doubled the returns of the MSCI World index since the start of the year, returning more than 3 per cent.
Performance of indices in 2015
Source: FE Analytics
Cordery points out that if valuations seemed toppy several years ago, investors would ordinarily buy into bonds until the market corrected itself and, having made money on their coupon, return to equities.
“If you do that today, you’re going to be reducing your income quite materially. 10-year bonds in the UK yield about 2.5 per cent, which is probably 1 per cent below where equity markets are yielding in the UK at the moment,” he said.
“And of course as interest rates increase, bonds will rise and the capital value of those bonds will go down. So rather than being a risk-free trade, it might actually be a return-free risk.”
“Then we look at equity markets – they’ve risen quite a bit and I think that’s on people’s minds at the moment. They’re thinking very short term – what’s happening in Europe at the moment has created a little bit of anxiety among investors.”
Despite this, there have been substantial dividend increases over the last decade, according to Cordery, and as such investors need to put their capital at risk in order to receive a decent level of income.
“I don’t provide the answer here, I just propose the reality – I suppose the other option is to stick it in cash and if rates do go up you’ll get a little bit more and at least your capital will remain where it is rather than into the market where it could be undermined a bit,” he reasoned.
The head of investor relations adds that the hunt for income spreads to retirement, following the pension freedoms introduced in April this year which provide greater flexibility.
This also means that investors are able to access their entire SIPP and choose how to receive their income throughout retirement.
While the changes have been welcomed and celebrated by many, Cordery remains dubious as to how much difference it will really make to how people will manage their pension pot.
“Pensions have all of a sudden gone from boring obscurity to possibly one of the sexiest investments that a private investor can make, but I’m a bit confused about this,” he said.
“I’m told that there’s going to be this pension revolution and everybody’s going to be doing something a bit different now they’ve got free access to their cash. I’m struggling with that because I don’t think they are, personally.”
“If you had a SIPP two years ago, are you going to be doing anything different post the announcement from the chancellor this year, just because you can get access to your capital a bit quicker than you used to be able to? Are you actually going to be changing your investment portfolio around a great deal? I’m not so sure.”
Instead, Cordery explains that investors will be altering their SIPP allocations based on how much income they feel they will need and how big their pot needs to be to generate income.
Rather than pension reforms, this will inevitably change depending on interest rates, levels of return and the risk that the investor is prepared to take.
Also, the drop in lifetime allowance from £1.25m to £1m has simultaneously imposed a tighter restriction which, according to Cordery, will be felt by some of people.
“So I don’t think there’s going to be this massive revolution when people manage their investment pots, if you like," he said.
"Certainly when I’ve spoken to discretionary fund managers, they tell me, ‘the only thing I’m not going to do is buy an annuity when a client reaches 75: I’m just going to initiate drawdown which I’ve been able to do anyway, but I can now do that drawdown for longer. And over time I will change the portfolio around a bit but not that much’.”
However, Corderoy says that more investors should consider allocating portions of either their SIPP or ISA to investment trusts as a means of complementing other investment vehicles.
A major benefit they can provide is access to illiquid and potentially lucrative assets such as property, private equity and smaller companies.
Not only this, investment trusts are better equipped to maintain or grow dividends even through times when markets have plummeted.
“Dividend smoothing bit is actually very important for investors, which is the ability to preserve some of the income that investment trust portfolios generate to pay out in lean years. You’re not going to be able to do that if you’re only in open ended vehicles – you are going to see dividend fluctuation,” Corderoy explained.
“So investment trusts can help that and in the accumulation phase, the fact that investment trusts can gear at good times and, if they manage that properly, that should create better performance over a cycle.”