Legal & General Investment Management fund manager Justin Onuekwusi attributed the rise in demand for income generating investments to pension reforms, but has warned there are a number of risks involved in chasing this type of investment.
“The major issue with chasing income comes from the complex relationship between yields and risk. Over the long-term higher risk assets have a higher expected return to compensate investors for the greater risk they are taking.
He pointed out returns on an asset can either come from capital growth or income and the proportion of each type of return for each asset is not the same, adding some high risk assets have high expected capital growth and a low yield and others may have low capital return and a high yield.
“Given the changes in pension regulations more investors are looking to multi-asset income funds to help them through retirement by relying on the income they provide. However it is more important than ever to sustain these pots,” commented Mr Onuekwusi.
Adrian Murphy, partner at Murphy Wealth, agreed, citing market volatility as a potential reason for the trend.
He said: “An increased demand in income-generating investments is certainly something we are seeing regularly.
“Clients are talking more and more about income as part of investment, particularly as the market has becomes more volatile, so income is definitely something clients are looking for.”
However, Mr Onuekwusi warned those making investments need to be careful, pointing out targeting high yields can lead to unsuitable portfolios and volatility over time.
He said: “If the objective of a fund is to target a level of yield then as the yields available in the market change, the amount of risk the portfolio takes as a consequence must be variable.
“The end result is the portfolio may drift across risk profiles as the fund seeks to maintain its yield target.”