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David Hambidge: Income investors can ride out market volatility

A change in investor mindset should hopefully see investors move away from chasing market returns and adopt long-term, sustainable investment goals.

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Finally, attitudes to investing appear to be changing and it’s about time too.

For far too long the emphasis has been on past performance, causing a knock-on effect of investors piling into the best performing country, region, theme or fund. The result in most cases has been a disappointing outcome at best and a financial disaster at worst.

The evidence for this is overwhelming, you just need to look at the flows into different asset classes over the years to see which were performing well, whether it was the rush to buy technology stocks in the late 90s or gold and emerging market debt more recently. All these areas produced fantastic returns for a number of years, although the timing of these inflows suggest that most investors were far too late to the party and, as a result, have suffered either disappointing returns or substantial losses.

I was delighted to hear recently that many of today’s investors are more concerned with investment solutions than league tables and quartile rankings.

The change has come about due to a massive demographic shift taking place, which will result in almost three quarters of the world’s retail assets being held by retirees, or those close to retirement, within five years. As a result, income has unsurprisingly moved to the top of many people’s priorities list, with inflation protection and low volatility a close second.

Given this environment, we feel the industry is still too focused on capital growth and undersells the attractions of a consistent income stream. This naturally feeds through to a broad lack of understanding among investors of how income actually works.

A common assumption is that income depends on capital returns and will go up or down depending on movements in the wider stock market and the capital value of an investment.

This is not the case and we are keen to stress to investors that capital and income can effectively be two separate accounts within a single fund.

A key point to grasp, considering all the turbulence faced in recent years, is that if managers are investing in the right areas, income can stay relatively consistent and grow over time, whatever the market is doing in the background.

Another key consideration for investors is whether or not the source of income from their funds is ‘natural’. In practice, this means whether the income feeds straight through from underlying holdings – the underlying funds and other investments in the case of our multi-asset solutions – to investors, or is funded by eroding capital.

Taking income from capital is common practice and fine in a bull market when capital is growing but the problems come in flat or falling conditions. In this scenario, investors are effectively eating away at their capital base to pay themselves income or it remains static, leaving less assets in the market when conditions start to recover.

Income fund managers often talk about being “paid to wait”, which means that providing your underlying companies are solid, the consistency of dividends provides time to wait for a stronger share price.

For investors whose primary need is income, volatile market conditions are less of a concern as long as the income keeps coming through. By buying an appropriate income investment, they have effectively been paid to wait while companies build or rebuild their asset value and share price. The same can be said of funds whether that be a single strategy offering or multi-asset.

David Hambidge is director at Premier Multi-Asset Funds

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