Income vs Income

Simon Evan-Cook, Senior Investment Manager at Premier Asset Management, explains that when investing for income it is important to understand that there are income funds and then there are income funds.

Occasionally markets throw up situations that force managers to choose between maintaining high income distributions and trying to avoid short-term volatility. Knowing whether your fund is focused on income or total return could help you to swerve disappointment on this front.

Premier multi-asset income funds, if you were wondering, are very much the former.

Perhaps that needs clarifying: There are some funds that are run primarily to generate an income for their holders, then there are some that use income as part of their process, with their real purpose being total returns (in the UK, income funds have a reputation for providing good total returns with lower volatility, which investors tend to like – even if they don't need the income). Our two income funds, the Premier Multi-Asset Distribution Fund and the Premier Multi-Asset Monthly Income Fund, are in the first camp: they live to generate income.

This might seem like semantics: there have been many income income funds that have generated great total returns, and plenty of total-return income funds that have generated a decent income. But it may matter for your clients. Occasionally markets throw up situations that force managers to choose between maintaining high income distributions and trying to avoid short-term volatility. Knowing whether your fund is focused on income or total return could help you to swerve disappointment on this front.

Take the environment today. On one hand, some markets seem stretched and politics look dicey, but on the other, traditional safe havens, such as cash or gilts, don't offer much income (particularly compared to inflation). A total-return manager, particularly if running a top-down, "macro" process, might sell their dividend-paying UK equities and bolt for the perceived safety of cash. However, doing so, especially for prolonged periods, will dent their income stream. This, in turn, will have consequences for any clients relying on that income to pay their bills.

This combination of disciplines has made income investing a powerful draw for UK investors. We believe its slow-and-steady approach is one of the surest ways to see them through the raft of uncertainties they currently face, just as it has for decades before this.

An income-focused manager, however, should be more wary of damaging their fund's income stream. We, for example, would describe ourselves as cautiously positioned in respect of our equity exposure. But we can also see that, with a yield of more than 4.4%, UK equities look an attractive income prospect. Not just because they yield more than cash or gilts, but because company dividends can potentially grow to counter inflation too. This is particularly important for the newly retired.

However, while our focus is income, that doesn't mean we don't care about total returns. Far from it: concentrating on income can, paradoxically, lead to better total returns too.

This is because of the discipline it imposes. For one, the need to keep generating income lowers the risk of managers "panicking" out of the market. There's usually a scary reason to think markets are about to collapse (take 2012's Cypriot banking crisis that had everyone in a lather – remember that?). We've seen many peers succumb to such fears over the last decade, invariably to the detriment of their clients. The commitment to produce steady income acts as a commitment to staying invested.

Complimentary to that, and this is the beauty of it, is that income investing also commits us to avoiding two of the other big risks that bring down funds: paying too much for assets or over-estimating assets' quality. For the former, the more expensive an asset becomes, the further its yield falls, making it more likely an income manager will sell it. For the latter, if we wish to maintain our income stream, we need to ensure the assets we've chosen (or the managers we've picked to choose those assets for us) are of sufficient quality to keep paying that income.

However, while our focus is income, that doesn't mean we don't care about total returns. Far from it: concentrating on income can, paradoxically, lead to better total returns too.

Those attributes are highly effective, but there's one more discipline we need to maximise our chances of defending an income stream: diversification. Sometimes it doesn't matter how good your analysis is; if you're only invested in one thing, it can be damaged by simple bad luck. That "one thing" could be anything from a single property, share or bond through to a country, region or asset class. Either way, ensuring our Funds' income streams are permanently diversified reduces the risk of bad luck, while also allowing us to access the best opportunities available.

This combination of disciplines has made income investing a powerful draw for UK investors. We believe its slow-and-steady approach is one of the surest ways to see them through the raft of uncertainties they currently face, just as it has for decades before this.

Find out more

For more information about Premier’s funds or portfolios, contact Simon Morris, Head of Strategic Partners, on 07738 958 072, or email simonmorris@premierfunds.co.uk.

Visit premierfunds.co.uk/global

This article is for information purposes and is only to be issued to financial intermediaries. It is not for use with customers. It expresses the opinion of the author and does not constitute advice. Past performance is not a reliable indicator of future returns.

Issued by Premier Asset Management, which is the marketing name used to describe the group of companies, including Premier Portfolio Managers Limited and Premier Fund Managers Limited, that are authorised and regulated by the Financial Conduct Authority. For your protection, calls are recorded and may be monitored for training and quality assurance purposes. 22101814576