Need for caution
Rory Maguire, UK managing director of fund ratings agency Fundhouse, warns that with some multi-asset income products now offering a yield above 4 per cent at a time when higher-quality credit pays “far below” this amount, investors need to be wary. Five of the table’s funds pay a yield of 4 per cent or greater.
Mr Maguire explains: “They take added risk in a few main ways. First is liquidity, where they may get the yield uplift from less-liquid markets such as loans or airline leases. And second from credit risk, by owning high-yield or emerging market debt. They often also own equities, especially with covered call strategies [derivative strategies that enhance yield].”
He adds: “The big question we ask when seeing a high yield is, ‘are clients receiving a lower-risk product suitable for their purpose of living off income with good capital protection traits? Or is the product now high risk?’”
Intermediaries have expressed similar concerns. Matt Harris, director of Dalbeath Financial Planning, avoids recommending products with a specific income target. A target-based approach “always leads to [a client’s] money being pushed into an ever shrinking range of industries and asset types which offer a high level of income”, he says.
“I fear that clients chasing yields of 5 per cent may indeed receive that income, but may lose 20 per cent of their capital as a result.”
Multi-asset investors have been quick to defend approaches that centre around a ‘high’ yield. As early as 2015, criticism of multi-asset portfolios with 5 per cent income targets prompted the likes of Kames, Barings and Seneca to defend their own payouts as sustainable, though some acknowledged concerns about the broader sector.
Other investment firms have reacted to these issues in a different way. In the multi-asset space and beyond, several fund houses have moved away from absolute income targets, or changed their product ranges because of the low-yield environment.
Last year Legg Mason abandoned an 8 per cent yield target on its Brandywine Global Income Optimiser vehicle, while the likes of Investec and Aberdeen were among those to overhaul products.
The debate feeds into a broader discussion about how much income clients can afford to withdraw from their retirement pots without potentially wiping out, or significantly reducing, savings that in some cases cannot be replaced.
Current high valuations in markets equate to low “safe” withdrawal rates, according to Morningstar’s research paper, ‘Retirement planning in the UK: A comprehensive update on the safe withdrawal rate’, released in October.
