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Old Mutual’s Ventre: Why investors need to outsource for income needs

John Ventre

Investors that are in retirement or require income from their investments tend to have a different attitude to risk than those looking to accumulate assets. Their concerns are more focused around having enough income to support them throughout the rest of their life. The need for income therefore becomes the driver but they still need to manage the scale of capital erosion to ensure that they do not run out of capital.

However, with returns on cash and government bonds at historical lows and equity markets across the world volatile, investors seeking income are facing some very tough questions, from how they can meet the rising cost of living for themselves, to whether their retirement savings are going to last the distance, particularly as life expectancy continues to grow.

These investors are increasingly on the lookout for solutions that can help address these growing concerns in these difficult and volatile times.

At first glance, traditional income funds could be a way of doing so.

That said, while there are a plethora of income solutions available in the market, there have been mounting concerns around the lack of clarity over the rate and the way some of these funds pay their income. This has led investors to question whether they are investing in the right fund for their needs.

Furthermore, a look at our home market shows that UK equities are highly concentrated. In the first quarter of 2012, the top 15 companies contributed 87 per cent of the dividends in the FTSE100. The result is that many active UK income funds hold many similar names.

This is where solutions such as the recently launched Skandia Generation funds can provide an innovative answer to these problems.

The Generation funds are a range of four multi-manager, multi-asset solutions that aim to generate a total investment return ahead of inflation, over a rolling investment period, out of which the funds target an annual income yield.

Neither the total investment return nor the income targets are achieved through the use of a costly guarantee. Instead, the Generation funds have exposure to a diverse range of global assets which enable them to generate a natural yield while spreading the investment risk. In addition, to help achieve the target level of income (either 4 per cent or 6 per cent per annum), the funds use a covered call investment strategy.

This involves selling options based on a number of equity indices, turning future growth in equity markets into a regular cash flow. That means higher levels of distribution are achievable without the need to resort to selling units of a customer’s investment, which would erode the capital value of that investment over time. Although the funds give up some of the investment upside in bull markets, by doing this, they do not impair total investment returns over the long-run.

The funds have been designed this way so that they can achieve a better balance between providing income and targeting total investment returns.

With the current market conditions looking to prevail for the foreseeable future, these funds can help advisers manage clients’ long-term income needs, by outsourcing the portfolio construction and ongoing asset allocation.

John Ventre is head of multi-manager at Old Mutual Global Investors


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