Investors’ focus on equity income has come under fire from multi-asset portfolio managers amid suggestions total returns are being overlooked.
Income has been a significant area of focus for both providers and clients since rates fell to a record low a decade ago but James Klempster, a multi-asset manager for Momentum, warned the shift could prove inappropriate for some investors.
“Income is just a component of total return,” he said. “A lot of people buy income needlessly: they could just as happily buy a total return fund. It [income] is just fashionable.”
His comments, made at the Lipper European Fund Selector Forum in London, come when yield remains a key concern for clients, in turn affecting business strategies in wealth and asset management.
Traditional sources of income remain highly popular. In May, the UK Equity Income cohort was the Investment Association’s fourth largest peer group, with some £65.6bn in assets under management.
But the growing demand for income continues to push down yields across a range of asset classes, making previously cautious strategies a riskier prospect.
This week, Capita’s Dividend Monitor revealed an all-time record in payouts from UK equities over the second quarter of 2017.
Earlier this year, Investment Adviser reported that shares from Europe had begun to yield more than riskier bonds in the region, reflecting a ‘symbolic’ moment for income-hungry investors.
Bonds, traditionally associated with income, have reached valuations that worry many asset allocators. As a result of this increase in price yields have fallen to record lows, cutting the income available from the asset class.
Given this, multi-asset specialists have urged investors to exercise caution when considering income-oriented approaches because of the potential risks involved.
“It worries me that people think income is synonymous with low risk,” said Mr Klempster. “It’s all about educating the intermediary market.”
Others echoed his concerns. David Coombs, head of multi-asset investments at Rathbones, told the same event: “Of my investment funds, the one I’m most nervous about at the moment is the income fund. We have probably the lowest yields we have ever had.
“Income strategies have huge headwinds. We have to give up some yield in the short term [via a cautious approach]. It’s about sustainable income. I hear about high income, maximised income and consistent income, [but] sustainable income should be the mantra to sell.”
Angst around these specific asset classes may explain reports of growing appetite for multi-asset income products.
Earlier this year, research by Heartwood, an investment manager, found that nearly 40 per cent of the advisers it surveyed had shifted income clients from single asset to multi-asset vehicles. Respondents cited a need for “more reliable long-term income” in their rationale for the switch.
The research found the most common income strategies rejected by advisers in favour of multi-asset income were high-yield bond funds. Others appeared to be shifting away from areas including property, emerging market debt and both UK and global equity income.