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The income imperative: investing for income

How can advisers obtain a reliable and rising income from an investment portfolio? This month, in an IFA Magazine special focus, we take a look at some of the issues involved and alternative approaches available when generating investment income

Whilst a completely comprehensive analysis of all the alternative approaches is somewhat beyond our scope in a single edition of IFA Magazine, we are pleased to introduce this month’s special focus on investing for income, bringing you different ideas and opinions from a range of experts. The idea is to try and help shape your thinking about some of the issues and indeed some of the possible solutions – to the challenge of providing your clients with a meaningful and sustainable level of investment income.

Move with the times

As we write this in mid-March, the 10 year Government gilt yield is just 1.50%. It’s no surprise therefore that investment in government stock has fallen out of favour. Investment grade corporate bonds are also not exactly flavour of the month, as concerns rise about how they will perform in an era of rising interest rates.

Long term sustainability of the real value of investment income is critical. UK inflation recently fell back from its recent highs to its lowest level since July 2017. In February, the Consumer Prices Index fell to 2.7%, from 3% in January. However, this is still a significant figure when compared to the 10 year gilt yield of 1.50%. The Office for Budget Responsibility’s estimates for inflation for 2018-19 and 2019-20 are 1.8% and 1.9% respectively. Whilst lower, these are forecasts which must be considered by asset allocators when making crucial decisions.

It is even more significant when we compare the inflation rate to current cash deposit rates producing negative real returns. Ok, so many experts are expecting the UK base rate to rise as early as May, but the dilemma is clear. How do you achieve a realistic level of income from an investment portfolio, whilst minimising the risks to the investor?

The equity income debate

We can debate whether or not stockmarkets look overvalued, however the current dividend yield on the FTSE All Share at 3.82% remains attractive and supportive. This is especially so when we compare it to inflation and to the 10 year gilt yield. An equity income strategy has the scope to deliver not only an increasing level of income but also some protection to the real value of capital for the future too. But what about the risks? Can clients accept the volatility and downside risk to capital? The latest equity bull market has been largely driven by growth stocks. That leads us to question whether the rather unloved “value” style of investing might be set to make a comeback. As well as the more traditional approach of UK equity income, global equity income strategies are also becoming more popular allowing managers the scope to build portfolios with greater diversification in order to try and minimise volatility and risk.

The song remains the same

Asset allocators look to reduce risk through effective diversification – geographically as well as of asset classes, of sectors, of stocks. Whether this is outsourced or managed in-house, the principles remain the same. The specific component parts of the portfolio will be largely determined by the risk tolerance of the individual client as well as the levels of income and growth which are needed – both now and in future – to fulfil the needs within the financial plan.

So, with complex decisions about whether to combine UK with global equity income funds, between active and passive approaches, how to use fixed income, plus the use of alternative investments such as VCTs, EIS and many other options to, it’s a constant challenge for advisers. We thank all our contributors for their input and insight and hope you find our special focus to be of interest.

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