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The Income Conundrum

The income conundrum In a low-yield environment, a regular income that does not destroy capital is the holy grail of retirement planning. Here, fund manager Nick Clay discusses how the recently launched Newton Multi-Asset Income fund could help achieve that aim.

The world's population is ageing and ageing fast. In the UK today, around 10 million people are over 65. Recent projections are for that figure to almost double to 19 million by 2050. Within this total, the number of the very old grows even faster. At present, there are around three million people aged over 80, a figure expected to reach around eight million by 2050. While one-in-six of the UK population is currently aged 65 and over, by 2050 this will rise to one in-four.1

But the UK is not the only country facing a senior citizen tsunami. The US, Canada, Japan and most of Europe all have rapidly ageing populations too. Even China still a dynamo of the world economy, albeit with slowing GDP growth ­ is heading towards the same demographic inflection point.

The size of this baby boomer2 age group is matched by its financial firepower. In the US, baby boomers hold 54% of all household wealth3. Globally, the spending power of consumers age 60 and older will hit US$15 trillion by the end of this decade, up from US$8 trillion in 2010, according to research from Euromonitor.4 Against the current low-yield backdrop, the primary concern of this coming wave of retirees is economic security ­and the best way to achieve this is to generate income. Clay says: "Research has shown one of the biggest challenges for retirees is replacing their salary. They generally have two aims when it comes to financial planning: they want their savings to generate income they can live off ­but they also want to maintain or grow their initial capital so they can pass it on to their descendants. "

According to Clay, the Newton Multi-Asset Income fund, which launched in February, has been designed with these aims in mind.

The primary goal of the fund will be to generate sustainable income. This compares with competitors who seek to produce income of between 5-7%. While this higher level of income is superficially attractive, says Clay, it is generally difficult to achieve over the long term without resorting to leverage or derivatives. Worse, in a falling market, to maintain that level of income, funds would likely need to 'raid' their capital, potentially becoming forced sellers at the bottom of the market, he says.

By aiming for slightly lower and more sustainable headline returns, Clay believes the strategy can provide not only a steady, repetitive income but can also generate capital growth, as it is able to avoid consuming capital at the wrong time. "Our solution is to keep it simple," he says, "but that doesn¹t mean it's easy."

The portfolio is diversified, with around 115 securities currently, and can invest in cash, government bonds, corporate bonds, convertible bonds and preference shares and equities. The portfolio's current top sector positions were industrials (10.9%)5, consumer goods (9.6%), telecommunications (8.6%) and consumer services (6.7%). Non-equity infrastructure holdings also make up a large weight (10.5%) on the portfolio. This is because of the inflation protection they offer and because their cash-flows are generally uncorrelated with the economic cycle, says Clay. He estimates they can be relied on for annual returns of between 6-9%, with a dividend component of some 5-6%. This compares favourably with government bonds which have an annual returns profile of generally between 2.5-3%, Clay estimates.

The annual management charge is set at 0.625% (for institutional W shares) and an initial fund size is targeted at around £100m. Looking forward, Clay is confident the strategy's straightforward remit is one of its strengths. He says: "Our measure of success is total return growth and then income return over the medium to long term. It isn¹t a new idea but it does have credibility."

1 House of Commons Library Research, Key issues for the new parliament, 2010
2 Those born between 1946-64.
3 Nielsen, Uncommon Sense: most baby boomers are not downsizing (quite the contrary), 9 Jan 2015
4 Bloomberg Aging Boomers Befuddle Marketers Aching for $15 Trillion Prize, 17 Sept 2013
5 All sector positions as at 31 Dec 2014 based on model portfolio data. Model Portfolio Data is not based on an actual trading history. There are no guarantees that the fund¹s actual portfolio will reflect the model data

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