Add to this the fact that FTSE-listed companies cut dividends or ditched them altogether as a response to the Covid-19 crisis, and it is clear there needs to be a better way of chasing income.
Capital growth is important, and clients in retirement will still need to consider how to invest for capital growth.
But, as John Newton, business development manager at Wise Funds, says, the most important thing for a client in decumulation is the reliability of income. Taking money from the capital is unreliable, and creating a portfolio that is simply diversified across asset classes might not be the wisest course of action to boost income.
This is why William Buckhurst, investment director and head of fund research at Vermeer Partners, says: “Diversification of income streams remains important. Income from high-yield bonds or commercial property can be disrupted along with equity dividends, as we have seen during the recent Covid-19 crisis.
“Investors tend to focus overtly on diversification of asset classes rather than diversification of income streams: many income sources have continued to be abundant during the crisis.”
Matthew Yeates, head of alternative and quantitative strategies at Seven Investment Management, believes the goal of achieving a reliable income in retirement requires a “blending” of different types of investments to grow both capital and income.
This is where a multi-asset approach can help, blending the right mix of assets to suit individual clients’ income needs. For example, Mr Hird says he has replaced government bonds – because they are too expensive and do not offer attractive yields right now – with corporate debt in the multi-asset portfolios he constructs, rather than add more equities.
Diversification is key. Mr Buckhurst says while the performance of asset classes such as government bonds and equities have started to move in line with each other in terms of capital gains, income streams across asset classes remain diversified.
The capital performance of bonds and equities have tended to correlate in recent years as a result of central bank policies. By buying bonds, and so pushing the price up, equities rose in value as investors fled higher bond prices.
Steve Pennington, head of wealth planning at Arbuthnot Latham, says while many multi-asset strategies will likely have a lower yield than a purely equity income fund, investors who “chase yield” by plunging into equity income funds will be missing out on some of the capital growth that can be had by pursuing a total return-based approach.
He says: “Total return should be the objective and if the yield from their multi-asset funds is not enough, they can simply disinvest some capital along the way.”
Investors grappling with the conundrum of bond yields and dividend income falling at the same time have increasingly turned to alternative income assets.