How can multi-asset solutions meet income requirements?

First, clients face the prospect of having to fund their own retirement should they choose to go into drawdown in later life. So products and solutions providing an income can be useful in client portfolios.

Providers have also recognised that the need for income is growing among advisers’ clients and have responded by launching products that target an income.

What is also behind the growth of income funds is the low-yield environment advisers and their clients find themselves in now. 

AJ Bell launched two new income funds in March this year that will pay income to investors monthly.

Kevin Doran, chief investment officer at AJ Bell, noted in the press release: “Income generation is a goal for a huge proportion of investors, particularly with interest rates remaining perpetually low and pension freedoms placing the onus on people to generate an income from their investments.”

Above and beyond

Where once investors might have been able to rely on a fixed income fund to generate the income required from their portfolio, this is no longer the case.

Now investors favour funds such as multi-asset income funds, which have the ability to source an income from across a range of asset classes.

Multi-asset funds can attempt to generate income from a wider range of assets, though as always, higher levels of income return generally means a higher level of risk.Ben Seager-Scott

As Will McIntosh-Whyte, assistant fund manager of the Rathbone Multi-Asset Portfolio Funds, observes: “Low yields from some fixed income assets mean that we need to look outside of this traditional source of yield to meet income requirements.”

Ben Seager-Scott, chief investment strategist at Tilney Group, explains: “Unfortunately, whilst low interest rates are a boon for borrowers, the knock-on effect is that savers suffer, and prevailing interest rates tend to underpin the income return for the vast majority of asset classes, to a greater or lesser degree. 

“The result is that many lower-risk asset classes, such as UK government bonds, have low income yields which are actually negative after accounting for the effects of inflation.”

In such a low-yield world, are multi-asset funds able to deliver income to clients?

“Multi-asset funds can attempt to generate income from a wider range of assets, though, as always, higher levels of income return generally means a higher level of risk,” he points out.

“However, using a multi-asset fund offers investors the opportunity to access income from a range of different asset classes, such as corporate bonds, income-yielding equities, property, etc.”

Mr McIntosh-Whyte acknowledges he has had to become “more creative” in generating yield from portfolios, looking outside of the traditional sources of income to investments including structured products, and at specialist areas, such as short-term asset leasing.

But he adds: “Not aircraft leasing though, which we have disliked for some time and completely avoid.”

And he still sees a role for equities, explaining: “Equities can still provide a healthy dividend and contribute to an income target, but they will always be ‘equities’ in terms of their volatility characteristics.”

The AJ Bell Income fund – one of the two it launched earlier this month – has the following asset allocation in order to target 4 per cent income each year for advisers’ clients:

Risk scale

Guilhem Savry, head of global macro and dynamic asset allocation, cross asset solutions at Unigestion, notes: “The search for yield has pushed investors to increase the risk of their portfolios through a combination of higher duration, lower credit quality, more illiquid assets or increased leverage. 

“We have made a different choice. We think that expanding our return sources with alternative risk premia will help to deliver income in a low-yield environment while not exposing us to risks we prefer not to hold.”

With some portfolio managers having to go higher up the risk scale in order to source income, what should advisers and their clients be aware of when selecting a multi-asset income fund for portfolios?

Mike Coop, head of multi asset portfolio management at Morningstar Investment Management Europe, suggests: “Fund managers are constrained by the level of income assets pay out, and to increase yield above this usually means they are selling assets and hence turning capital into income. 

“So investors should be very cautious about funds that offer much higher yields in terms of checking what extra risks come with this, how much the product costs and whether the value of their capital will keep pace with inflation.”

eleanor.duncan@ft.com