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An adviser’s approach to investing for income – Pat Connolly, Chase de Vere.

An adviser approach to investing for income

Patrick Connolly, head of communications at Chase de Vere, summarises the firm’s approach


At Chase de Vere, our starting position is that income investors should have a guaranteed income to, at the very least, cover their basic living costs. For those in retirement this is likely to come from a combination of the State Pension, defined benefit pension schemes and lifetime annuities.

We do have concerns about the number of people who have gone into pension drawdown without taking independent financial advice and who could effectively be gambling with their future standard of living.

Increasing demand for investment income

However, we must recognise that with State Pension ages increasing, the decline in defined benefit pension provision and many people put off by the lack of flexibility and perceived low rates on annuities, that an increasing number of people are relying on their investment portfolios to generate a steady income.

In theory, it is a sensible approach for income seekers to have a portfolio which naturally produces the level of income they need on an ongoing basis. However, this would result in many having to make difficult decisions in terms of the level of income they want or need and the amount of risk they’re prepared to take to achieve it.

Suitability requirements come first

As advisers, before we consider a client’s particular income requirements, we must look at the overall circumstances and attitude to risk that relate to that client. In terms of constructing and managing an investment portfolio, this means getting the asset allocation right and worrying about the yield on different investments and asset classes later. This is where independent advice adds real value, as all other assets the client holds should be considered, whether they can be used to provide some of the income required, how secure the asset is and importantly, how any income generated or withdrawn will be treated for tax purposes.

If investors focus on achieving the maximum level of initial income, this is likely to mean being exposed to higher risk areas and having very limited growth prospects, increasing the danger not only of capital losses but also that the effects of inflation will reduce the real value of their capital and the spending power of their income over time.

Diversification is key

As advisers it is our job to help our clients meet their long term objectives by developing a suitable investment portfolio that will continue to meet their needs in future, as well as in the present. We know that equities have the best long-term potential for income and growth. However, holding everything in equity-based assets is too risky for many income clients, especially if a market downturn could impact significantly on their finances. Equities may be needed for their growth potential but should be held as part of a diversified portfolio alongside other assets such as fixed interest and commercial property, which both produce a regular income and provide some protection if stock markets fall.

Many income investors hold too much of their money in UK assets. This is typically through UK equity income and UK fixed interest funds and commercial property funds which invest only in UK properties. As it makes sense for growth investors to spread risks geographically, the same is also true for those seeking income. There is now a wide range of global and international equity income funds available, many strategic bond funds will hold overseas assets as do high yield funds, where the major markets are in the US and Europe, and there is an increasing number of other global bond funds available too.

Having achieved the right asset allocation, we can then consider income requirements. Rather than simply just looking at high yielding assets, if the resultant portfolio doesn’t produce sufficient natural income for the client’s needs in its own right, this can be topped up by making capital withdrawals, which could even prove to be a more tax efficient way to generate income.

Some of our favoured funds for delivering income are:

Artemis Global Income

The fund manager looks at both the macro economic outlook and individual stock picking and spreads risk by investing in a mix of companies which pay high levels of dividends, those with more growth potential and special situations stocks. This approach works well as the fund has a strong track record and currently pays an annual income of 3.6%.

Invesco Perpetual Global Equity Income

This fund adopts a team approach with experienced underlying fund managers sharing their best stock ideas. Nick Mustoe, the Chief Investment Officer at Invesco Perpetual, then takes these ideas and is responsible for the overall asset allocation. It is a stock picking fund, investing mainly in large cap, quality companies and has a current yield of 3.1%.

Rathbone Income

This is a risk-focused UK equity income fund with an experienced manager in Carl Stick, who has a consistent record of increasing income payments year-on-year. The manager seeks to invest in high quality UK companies, at a sensible price, and the fund currently pays an income of 4.1%.

Janus Henderson Strategic Bond

This fund usually pays a competitive level of income as the managers tend to have significant weighting in high yield bonds. The current concentration is at the bottom end of investment grade and top end of high yield, which is an approach the managers are happy with while default rates remain low. The current yield is 3.3%

Rathbone Ethical Bond

This is a high conviction fund which looks at investment themes, credit analysis, valuations and risk, before conducting ethical screening. The ethical emphasis means that the fund contains some interesting bonds paying good yields, such as a UK disability charity supporting disabled people and their families, a not-for-profit company focusing on social housing and a mentoring programme for ex-offenders working with social housing associations. It has a yield of 3.8%.

Janus Henderson UK Property

This is an income-focused fund managed by an experienced investment team. While the portfolio is diversified in terms of the types of properties it holds, it currently has a large weighting in the South-East of England, which the managers believe should provide the best protection in a downturn. The yield is circa 3%, although the fund currently holds about 20% in cash.

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