Generating an income has been an increasingly important objective for many investors.
The income available from conventional savings accounts has dwindled to near-zero at a time when changes to the pension rules have set more retirees in search of income-generative investments to replace an annuity income stream. The insurance and asset management industries have responded and advisers now have a wealth of income choices available: How can they navigate these choices for clients?
We believe there is a virtue in simplicity and would argue that diversification within the major asset classes is more than important simply selecting the fund with the broadest spread of assets. Security by security analysis can ensure diversification across a blend of risk factors, rather than simply the broad macro factors such as interest rates or investor risk appetite that often guide the performance differential between asset classes. In particular, a focus on valuation can ensure that a fund manager avoids the worst excesses of the market and mitigates risk.
We would also argue for the importance of a 'real yield' – a yield that is organic rather than generated artificially. At a time when interest rates are at 0.5% and the income available on cash savings is negligible, an investment paying 7-8% will have associated risks, be that liquidity, default or business risk. Equally, a number of equity funds now artificially raise the income by selling call options. This is a valid strategy, but may cap a fund's capacity for capital growth.
Advisers looking to build a robust and reliable income-generative portfolio for clients have a range of factors to consider, in the blend of assets they use, the risks they are taking and how those investments are structured. A higher, inflation-adjusted income for clients is possible, but advisers must ensure that it does not come at too high a price.
|Asset allocation name||Attitude to Risk||Risk Rating|
|Jupiter Strategic Reserve Fund||Moderately Cautious||2.3|
|Jupiter Merlin Income Portfolio||Balanced||3.5|
This article is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Any data or views given should not be construed as investment advice. Every effort is made to ensure the accuracy of the information but no assurances or warranties are given.
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