A Kames Capital fund manager has disputed it is necessary to take on more risk in order to reach the ‘magic’ 5 per cent income target.
This comes as experts warned the 5 per cent income promise is now “unrealistic” unless managers ramp up the overall level of risk of their funds.
Kames Capital’s Vincent McEntegart accepted it was more difficult now to achieve that level of return but said there are ways of ensuring the fund does not go up the risk curve to achieve it.
He manages the firm’s £304m Diversified Monthly Income fund, which has had a 5 per cent income target since it was launched and also aims for some capital growth.
“We are reasonably confident in our ability to achieve that 5 per cent income,” he said, pointing out the fund’s yield over the past 12 months has sat just above this target.
“We have not taken on more risk to achieve that,” he said, adding the amount of risk the fund is taking on is approximately 50 per cent of equity market volatility, which has “historically been the case” since the launch of the fund.
While the average income of the fund sits at 5 per cent, the Kames fund manager said all of the stocks he invests in deliver an income that either sits underneath or above this level, in order to provide a mix of different risk characteristics.
He said: “The way to manage the risk at a consistent level is to put together lots of different risks from uncorrelated asset classes, which enable you to control the overall level of risk at your target.”
He said the only way a fund like this could encounter a problem in terms of maintaining the level of risk is if there was another global financial crisis, which would cause the value of all the investments to go down together.
Mr McEntegart admitted the 5 per cent income target was challenging to achieve when the fund launched back in 2014, and said it was now even trickier because rates of return are so low.
“But we still think this is do-able, and if we thought the amount of risk we had to take was unreasonable, then we would communicate to investors that we would have to lower the income target.
“We are not at that stage today and we are not anticipating being there.”
But Andrew Wilson, head of investment at Towry, disputed whether it was possible to achieve a 5 per cent return without taking on more risk, particularly when comparing the level of risk taken on 10 years ago to get the same level income.
He agreed that if you include enough diversifying investments, then the overall risk of the portfolio can still be contained, but added: “Nevertheless we live in what Standard Life’s Andrew Milligan calls ‘a world of small numbers’ and have to face up to this reality.”