The magic 5 per cent income level that investors have historically come to expect is now “unrealistic” unless managers start to snap up riskier assets, experts have warned.
Rob Pemberton, investment director of wealth manager HFM Columbus, said investors need to appreciate that the income streams they can attain from their investments is getting ever lower and in many cases is negligible.
He said we remain in a low growth, low interest rate, low inflation and low returns world.
With global growth remaining sub-par plus interest rates set to remain ‘lower for longer’ everywhere except for the US, Mr Pemberton said it is unrealistic to construct an income portfolio yielding the magic 5 per cent level that investors have historically come to expect.
He said: “Government bonds yield less than 1 per cent, investment grade corporates less than 2 per cent and the FTSE 100 3.5 per cent - so it is unrealistic to construct an income portfolio yielding the magic 5 per cent level that investors have historically come to expect.
“This has led to ‘yield tourism’ as investors migrate into higher risk assets based purely on their higher yield.
“This leads to two main risks – illiquidity (bricks and mortar property funds) and questionable quality (emerging market and high yield bonds).”
Patrick Connolly, certified financial planner at Chase de Vere, said the 5 per cent income portfolio does still exist, simply because some people need a higher level of income to meet their financial objectives.
However, Mr Connolly agreed it is incredibly difficult to achieve this and still retain a balanced and diversified investment portfolio and so in many instances investors might need to take capital withdrawals, as well as natural income, to hit their target.
He said: “Those taking a higher level of withdrawals are obviously at more risk of their capital eroding, especially with many investment assets currently looking expensive.
“This is why investors need independent financial advice, not just when setting up income generating portfolio but also on an ongoing basis to ensure income levels are sustainable.”
Darius McDermott, managing director of Chelsea Financial Services, said in order to get a 5 per cent income yield you would need to invest in equity income funds using covered calls to increase the yield (like Fidelity Enhanced Income), infrastructure funds and high yield bonds, for example.
But Mr McDermott said there are fewer and fewer of these types of bonds and you are having to take on more risk as it isn't an easy task.
He said: “So investors would probably be better served by having slightly lower expectations in today's environment. Four per cent to 4.5 per cent is much more achievable and there are more options."
Jason Hollands, managing director for business development and communications at Tilney Bestinvest, said he agreed with the contention that a 5 per cent yield is too ambitious in the current environment of ultra-low interest rates and decimated bond yields, unless you are prepared to skew a portfolio to riskier asset classes and let asset allocation be an outcome of a fixation on yield rather than a tool for diversification of risk.
Mr Hollands said: “But that path could be self-defeating, leading to capital losses or lower growth potential.
“Unless you’re desperate for immediate income, it is better to invest in portfolio where distributions are sustainable and have the scope to grow over time as the capital value of the portfolio appreciates.”
