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Creating a sustainable monthly income

As Helen Bradshaw explains, there are two secrets to building a portfolio that can deliver a consistent monthly income to your clients. One is to diversify across different asset classes, geographies, instruments and investment strategies. The other is to plan a full year into the future.

There’s nothing new about funds that pay investors a regular income of some kind. In fact, taken as a group, such funds are one of the cornerstones of the investment management industry.

This simple fact can make it difficult to understand why such a well-established part of the investment firmament has been so slow to fill the huge gap left by the effective demise of the lifetime annuity. Back before the Global Financial Crisis (GFC), when the West still had interest rates to speak of, annuities paid out a meagre but guaranteed monthly income which for decades provided a ‘sleep at night’ solution for millions of UK retirees.

Changing times

Unfortunately, annuities were one of the first major casualties of the new era of super-low interest rates meaning that the income from a lifetime annuity is today around the lowest it’s been in some 300 years. As a result, more than half of the UK’s annuity providers have simply ‘upped stumps’ and closed to new business in recent years.

In the meantime, very few fund managers have launched products that fill the void by paying monthly income while still fewer offer income ‘smoothing’ which makes each month’s income payment broadly similar in size. 

This is crucial for clients that need an income they can rely upon for their day-to-day needs as even the highest yielding portfolio will quickly lose its utility if the pay-outs veer between famine and feast every month.

This is a great shame as within the next 20 years or so, around a quarter of the people living in the UK – about 17m people – will be aged 65 or over in the country that provides the lowest state pension in the developed world.

Old problem, new solution

Probably the main reason that so few robust monthly income solutions have been launched is that there’s no single asset class that can be relied upon to deliver a sufficiently high level of income, in consistent enough dollops, to do the job.

To really deliver on this sort of mandate requires the broadest diversification across asset classes such as equities, bonds, property and alternatives as well as different investment strategies and product structures. 

Any portfolio aiming to generate a strong and sustainable level of income in every month of the year will need to pull all these levers in order to ensure there are enough opportunities germinating every month to keep your clients’ income payments in a consistent band. 

Ultimately, this requirement makes monthly income funds a multi-asset investment discipline and also helps explain why relatively few specialist asset managers have launched an offering here. 

Concentrating too hard…

To illustrate the risks of relying on just a single asset class or geographic market, we need look no further than the storied FTSE 100 Index – a ‘grandaddy’ of income strategies thanks to its long history of generous dividend payments.