Fund buyers are preparing for further disruption after a month in which several asset managers acknowledged the low-yield environment was making it impossible for their products to meet income targets.
Four firms proposed to either scrap or amend fund payout targets in August, blaming the low level of income on offer in markets.
Buyers have now warned of the growing likelihood other asset managers will follow suit given the increasingly arduous task of locating income without plunging into far riskier markets.
Gavin Haynes, managing director at Whitechurch Securities, said fund buyers would have to reappraise client expectations and rebuild portfolios accordingly.
“Where there is a fundamental change to a strategy, this will undoubtedly have an impact on fund selection,” he said.
Gam investment director Charles Hepworth said: “In the current environment of distorted yield compression in all asset classes, it is understandable that income targets of yesteryear will have to be lowered.”
But the speed of the latest moves in the likes of fixed income markets appears to have caught out some providers. BlackRock said on August 1 that “prevailing market conditions” had caused it to review the inflation plus 4 per cent target of its Income Strategies trust, a policy adopted just 18 months ago.
Bond markets in particular have seen yields tumble further this year, owing in part to asset purchase programmes from major central banks. Around a quarter of all sovereign debt now trades with a negative rate of interest, with corporate bond yields suffering similarly.
Two bond funds announced changes last month as a result. The Legg Mason IF Brandywine Global Income Optimiser abandoned its 8 per cent yield target, while Investec plans to merge its Strategic Bond fund into a multi-asset vehicle.
Meanwhile, Aberdeen said its Distribution fund, which focuses on fixed income and UK equities, now intends to invest in global stocks and alternative assets because of “the expected continuation of historically low UK interest rates, declining bond yields and declining dividends”.
Jason Hollands, managing director at Tilney Bestinvest, said the four fund overhauls could mark the beginning of a wave of changes and closures.
He said: “There will be others who will use the cover of the current, highly unusual market environment where yields have been obliterated to merge away or close products that are either sub-scale or uncompetitive.”
Other fund buyers supported the moves. Mr Haynes said vehicles like Legg Mason’s would otherwise be forced into high-risk areas given the lack of income available in traditional bond markets.
“It is not [in] investors’ interests to chase unrealistically high yields if it is going to be detrimental to the total returns or materially increase the risk.”
Gam’s Mr Hepworth added: “From an investor’s standpoint, it will obviously be disappointing, but chasing yield as a sole investment objective isn’t something we would suggest. From the fund houses’ view, it is obviously better to achieve on a more deliverable objective.”
