Talking Point: Income
Income. We all need it and it seems increasingly difficult to come by. Perhaps that is why income is consistently one of the most searched-for outcomes on the Square Mile Academy of Funds website. Victoria Hasler, Head of Research at Square Mile explains how we should be thinking about income and where we can find it.
- Income has become a priority as retirees opt for drawdown rather than buying annuities
- Not all income is created equal and it is important to match the income stream to the investor’s needs
- There is a vast choice for investors who want income, but it should be matched to investor needs
I think it is helpful to ask ourselves exactly why investors want income. Firstly, many people want it to supplement their pension or salary. The changes in pension regulations have increased the focus on this area, as some retirees prefer to seek income strategies rather than buying annuities with their pension pots. The second reason is to pay liabilities, whether that be school fees, nursing home fees and so on. Finally, many investors consider income investing to be an investment strategy in its own right, even if they do not explicitly need the income stream.
In order to illustrate this, let’s think about three different kinds of fund.
- A steady eddy - For these funds the level of income is pretty consistent over the years, but the distribution yield of the fund may have fallen some way from its peak. This kind of fund might be useful for investors who have a known income need, or who simply want a predictable income stream.
- Growing income - The second type of fund is one whose income stream has grown over time. The actual amount of income received is increasing each year, but the yield has fluctuated quite considerably. This might be useful for investors whose income needs are likely to increase over time, with inflation for example.
- Consistent yield - The third type of fund is one with a yield target. Here the level of yield has been consistent, but the amount of income received each year has varied.
The point here is not that we should favour one type of income over another, or that one is in some way better, but rather that each could be useful for different investors with different needs.
"As an industry we tend to talk about income in terms of yield whereas the end client is often much more interested in the absolute level of income received."
There is, as with many areas, a vast amount of choice now for investors who want or need income. The challenge going forward is to help our clients by trying to think about income in the same way that they do.
For example, higher yields undoubtedly mean higher risk but if investors really need the income it may be a price worth paying. Equally, perhaps some investors are happy to accept a degree of capital loss in order to generate the income they need in a kind of annuity-style product. For others capital preservation is of utmost importance and they are happy to receive whatever level of income is commensurate with that.
For more information on this and a variety of other topics, and to find funds which we believe meet an income outcome, please take a look at the Square Mile Academy of Funds website.