Faced with plentiful headlines about underfunded pensions or potential changes to the tax system for pension pots, retirees can be understandably confused when all they want is a steady, resilient income stream to fund a comfortable later stage of life.
Traditional sources of such income have dried up since the global financial crisis more than a decade ago, and this has been exacerbated by COVID. The policy response from governments and central banks accelerated pre-existing trends and pushed interest rates to previously unthinkable levels as central banks doubled down on using ever-looser monetary policy in an attempt to protect the economy.
Retirees now face very limited options with respect to defensive assets, such as cash and developed market sovereign bonds, which historically have been the go-to allocations. Even high yield corporate bonds now offer very little income. In addition, given the fiscal support for lower unemployment, central banks trying to stoke inflation and the likelihood of pent-up consumer demand being unleashed as we gradually return to normality, there is a reasonably high probability of an inflationary scenario transpiring, especially in the US. Against a backdrop of low yields and possible inflation, we believe the future for fixed income assets and their ability to provide income is bleak.
Casting the net wide
To navigate the environment ahead, we think it is important to cast the net wide and take advantage of a broad multi-asset opportunity set. For example, we see compelling opportunities in high yielding equities whose dividends are underpinned by strong cash flows. As the world recovers and returns to normality, these cash flows can rise, which in turn can fund distributions to investors. Fixed income isn't completely barren, but it is crucial to be selective, focusing on those yields that are backed by resilient cash flows and compensate for the level of risk taken. Crucially, given the less reliable diversification and returns offered by traditional fixed income assets, the need to manage risk at a portfolio level is paramount.
Delivering a defensive income
For those investors seeking a stable, defensive income stream – often the core objective of retirees – we'd encourage them to look across the whole market for the best opportunities, be flexible enough to take advantage and be able to weather less stable market conditions.
In essence, this is the core philosophy of the Ninety One Diversified Income Fund, which has been successfully accomplishing this since 2012.
Reliability in an uncertain environment
Given the weak fixed income outlook, and equities reaching ever more lofty valuations that are vulnerable to correction should the road to recovery disappoint, the outlook remains uncertain. For those in retirement, it is important to protect underlying capital and draw a sustainable income from it.
How is this achieved in practice?
To find out how we apply a defensive approach, with growth, read more about our three-point checklist that an investor should consider in order to source a sustainable level of income while reducing the need to withdraw from their underlying pot of capital:
The value of an investment can fall as well as rise and isn’t guaranteed. Your client could get back less than they invest.
Performance and volatility targets are subject to change and may not necessarily be achieved, losses may be made. Past performance is not a reliable indicator of future results. The amount of income may rise or fall. The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the
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Ninety One has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited.
This communication is not an invitation to make an investment nor does it constitute an offer for sale. © 2021 Ninety One.