Funds are unlikely to continue generating an investment income yield in excess of 4 per cent, according to a survey of financial advisers, discretionary wealth managers and private investors, creating potential problems for those needing income in this volatile, low growth, and low interest rate environment.
Research by Aviva Investors found that 84 per cent of financial intermediaries and 60 per cent of their clients think a yield of more than 4 per cent is not sustainable or realistic. Yields at or below this level, however, are considered to be achievable.
Readers wouldn’t have failed to notice that income has generally become harder to find over recent years, after ultra-loose monetary policy from the world’s central banks pushed fixed income yields down to historic lows and drove up the valuations of so-called ‘bond proxy’ stocks such as utilities, consumer staples and real estate companies.
Price performance of indices over 5yrs
Source: FE Analytics
Euan Munro, chief executive at Aviva Investors, said: “Before the global financial crisis, achieving a 5 per cent target was not an unrealistic income goal. Our research shows both advisers and investors recognise that this is not an obtainable level of return without jeopardising capital, and is unlikely to be sustainable.”
When it comes to advising clients on income solutions, 66 per cent said that dealing with expectations of income levels was a key challenge. Some 60 per cent also cited compliance administration and dealing with regulation are difficulties.
These challenges sit alongside a growing demand for income from investors. When asked what was the single most important requirement clients have of investment providers the ability to offer a sustainable, regular income came out on top.
While that 4 per cent yield figures is seen as unrealistic to most, 71 per cent of investors said they would find a fund offering this to be an attractive proposition.
FE Analytics shows there are 214 funds out of the 3,479 in the Investment Association universe that offer a yield of more than 4 per cent.
According to our data, FE Alpha Manager Sean Ashfield’s Consistent Practical Investment – which is a fund of investment trusts – is the universe’s highest yield at 13.72 per cent. It’s followed by Old Mutual Bond 3 (9.70 per cent) and Consistent Unit Trust (9.50 per cent).
Consistent Practical Investment holds five FE Crowns for superior performance when it comes to stockpicking, consistency of outperformance against a credible benchmark and achievement of results at a relatively low risk over recent time frames.
The fund is first decile in the IA Mixed Investment 40%-85% Shares over three and five years. Indeed, it has posted the peer group’s second highest total return over the past five years, our data shows.
Source: FE Analytics
However, investors also expect their income to be delivered within a modest risk budget – the average risk appetite of those aged 55 and above is 3.7 on a scale of 1 to 10 – and 60 per cent of investors are not prepared to take higher levels of risk in order to get more income in retirement.
These concerns mean that around half of intermediaries and investors view multi-asset and multi-strategy funds to have the best potential to achieve sustainable income. Diversification, the potential to deliver income and growth, sustainability and reasonable cost were cited as the main attractions of these products.
One respondent to the research said: “Every portfolio should have one.”
Munro added: “Traditional asset classes that once generated an attractive level of income are not yielding anywhere near to what investors require, and this is driving them to diversify their asset mix.”
“Investors are increasingly seeking out multi-strategy funds as a result, and our research shows their popularity is set to increase. They have a crucial role to play for today’s investors who need solutions that will achieve their objectives, regardless of market movement, and within a risk parameters where they are comfortable.”
There are five multi-asset funds that have secured a place on the FE Invest Approved List, which was until recently known as the FE Select 100, and are yielding more than 3 per cent. These are Henderson Cautious Managed, Invesco Perpetual Distribution, Jupiter High Income, Jupiter Merlin Income and Standard Life Investments Dynamic Distribution.
The graph below shows the income earned on an initial investment of £10,000 made five years ago. Jupiter High Income, headed by FE Alpha Manager Alastair Gunn and Rhys Petheram, leads with a payout of just under £2,680.
Income earned on £10,000 over 5yrs
Source: FE Analytics
The highest yielding of these funds – and one which pays out dividends monthly – is Paul Causer, Paul Read and Ciaran Mallon’s five FE Crown-rated Invesco Perpetual Distribution fund. It’s currently yielding 4.69 per cent.
Invesco Perpetual Distribution sits in the IA Mixed Investment 20%-60% Shares sector’s first quartile over three and five years. It was also top quartile in 2011, 2012 and 2013 but its cautious stance on bonds combined with a higher allocation to lower-risk but lower-yielding equities and cash meant it dropped into the third quartile during 2014.
FE’s analysts point out that this means future returns are likely to be smaller than they have been in the past, although most of its gains are expected to come from income rather than capital appreciation.
Invesco Perpetual Distribution has a clean ongoing charges figure (OCF) of 0.82 per cent.
