Those charged with creating income portfolios for clients have, since the global financial crisis, faced a uniquely difficult situation.
In the years between the end of the financial crisis and the advent of the pandemic, the challenge was that few assets offered much of a yield, with the equities that performed best – mostly in the technology space – being those that did not pay a yield.
And in the fixed income universe, a combination of low growth, inflation expectations and central bank bond-buying programmes meant yields reached, and stayed, at historically low levels and in some parts of the world were actually negative.
The story changed more recently, with both bond and equity market yields rising stoutly, but the challenge being that inflation has risen even more quickly, so the real or post-inflation value of the income remains negative.
A longer-term challenge is that clients tend to live much longer now in the decumulation phase than was the case historically, perhaps altering the composition of the assets in the typical retirement pot.
James Klempster, multi-asset investor at Liontrust, says: “We are in a price shock, inflation has remained higher for longer. But it’s a rolling series of individual price shocks, rather than the factors that make it more permanent.
"So there is a short-term pinch in terms of the income you can get from a portfolio but on a, say, two-year view, inflation will come down and yields will be more attractive.”
He adds: “For the decade after the financial crisis, income-focused clients had to move up the risk spectrum to get income. They had to move to, say, corporate bonds from government bonds or into equities. And that might not have been right for every client.
"But with bond yields rising now, we are very close to the point where US government bonds have a higher yield than the US stock market, and that’s a situation that hadn’t happened for many years. And it represents an opportunity for some income-focused clients to take less risk in their portfolio, if they want to, and still get a decent level of income.”
James Sullivan, head of partnerships at Tyndall, says it is imperative that clients think about an income portfolio in the same way they would a total return portfolio, instead of just focusing on the income generation, as the latter approach risks leaving investors in assets that could decline in capital value.
Keith Balmer, a multi-asset investor who works on the Universal fund range at Columbia Threadneedle, says: “There was a long period of time where income-related funds and assets did well. That ended just prior to us launching our income fund.
