For investors seeking a defined outcome – and for those advising them – the lack of clarity about the future is less than helpful. It is important to remember however, that change brings opportunities as well as challenges and embracing these can be crucial in meeting investment objectives.
Please remember as with all investments your capital is at risk and you may not get back your original investment. As the fund invests globally changes in rates of exchange may influence the value, price or income of investments. The yields generated by income funds are not guaranteed and can fluctuate and as always past performance is not a guide to future performance.
The income challenge
Income investing is one area in which the desired ‘outcome’ – an attractive and reliable yield – is obvious and of course, despite the prospect of a modest rise interest rates over the next 12 to 18 months returns from cash-based savings look set to remain relatively lacklustre. As a result, many people are having to reassess their willingness to accept additional risk to their capital in return for income. As well as the level of income, the consistency of the flow is key – a characteristic that is often at odds with the inconsistent world in which we live and invest.
Delivering income for 10 years
At inception in 2007 we were keen that the BMO MM Navigator Distribution Fund contained as wide a range of income generating opportunities as possible and in the years since launch, the portfolio’s remit has continued to broaden. Today, equity income funds from around the world sit alongside their UK focused counterparts whilst in fixed income, flexibly managed vehicles are capable harnessing a range of related opportunities that lie beyond those available to many passive strategies.
Importantly, the asset mix extends beyond equities and bonds. Commercial property is a long-favoured location for income seekers but as elsewhere, it makes sense to seek out opportunities that really serve to enhance portfolio diversification. Funds investing in student accommodation and UK holiday parks provide an attractive alternative to large commercial property funds heavily biased towards central London offices. Remember how many in the latter camp felt the full impact of the Brexit result? Numerous other alternatives now exist. The portfolio has contained infrastructure funds and now includes select exposure to peer-to-peer lending and more recently, a fund generating yield through aircraft leasing. When it comes to income generation it seems that the sky’s the limit!
Case study: Amedeo Air Force Plus
Income the natural way
Of course, selectivity is key and it is important to invest carefully. Longevity is an important consideration and in our view an emphasis on ‘natural’ income makes real sense. Income can be derived from assets in a number of ways. Equities may pay dividends; bonds issue coupons and commercial property assets generate income in the form of rent from tenants. In these and other areas ‘natural’ income is yield that isn’t being generated at the expense of capital. For example, a company might be paying high dividends but its business may not be able to sustain these over the long term. Cutting payments in the future would be bad news for income and would likely see the price of shares fall too. We argue a better strategy is to favour companies that pay a level of dividends that their business can naturally sustain. The same theory extends to other asset types and the likely longevity of such an approach stands in marked contrast to the potential eroding impact of an income drawdown strategy.
Mind the drawdown
Post the pension freedoms implemented in 2015 drawdown (selling investment units to generate an income) is an increasingly a popular choice, but what about the broader investment considerations? In the accumulation phase the benefits of ‘pound cost averaging’ are widely appreciated. Compounding of returns can be powerful and by dripping money into the market a portfolio can often be better placed to iron out the fluctuations that asset markets inevitably suffer. Apply the same theory in the drawdown phase, however, and the benefits of pound cost averaging can soon be reversed. In a world in which life expectancy continues to tick upwards the longevity of any strategy aiming to deliver income is a key consideration.
Back to basics
The future direction of markets is hard to predict – especially in the short term – and events over which individuals have no control can make themselves keenly felt on investments and the outcomes they are designed to achieve. Against this backdrop it makes sense to keep focused on proven investment principles and remember that applied correctly, diversification and natural income can prove to be a potent combination.
In the years since its launch our BMO MM Navigator Distribution Fund has proven capable of successfully meeting the demand for income. It is currently yielding 4.7%*, and since its first distribution on the 30 May 2008 has paid out more income than any other fund in the IA Mixed Investment 20-60% Shares sector.**