Helen Bradshaw on how to meet the changing needs of today’s income investors
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Within 25 years, nearly 1 in 4 of the people passing you on a UK street will be over 65.* Retirement is becoming a larger portion of our lives and retirees are pursuing ever more active lives including travel, culture, and other pursuits. How to afford these longer, action-packed retirements is a national and personal challenge. Building a big enough pot of savings is one issue. Turning that pot into a steady, sustainable stream of monthly income is another, especially in a period of ‘lower for longer’ interest rates and potentially volatile end-of-cycle investment markets. In this guide, Helen Bradshaw of Quilter Investors explores the challenge and describes two new risk-targeted multi-asset income portfolios which, she hopes, will form part of the solution for some investors.
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For Investment Professionals only. Past performance is not a guide to future performance and may not be repeated. Capital at risk. This communication is issued by Quilter Investors Limited (“Quilter Investors”), Millennium Bridge House, 2 Lambeth Hill, London, England, EC4V 4AJ. Quilter Investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543). For further information and to access the KIID and prospectus for the Quilter Investors Monthly Income and Quilter Investors Monthly Income and Growth Portfolios, please visit: www.quilterinvestors.com.
Important Information
*Source: The Office for National Statistics (ONS), How Would You Support our Ageing Population, 24 June 2019, http://bit.ly/2lFYFTI
Important information
The needs of investors nearing retirement are shifting up a gear. But the returns available from safe fixed-income investments are stuck in neutral, obliging investors to choose between uncomfortably low incomes or more exciting investment strategies with less-than-transparent levels of risk. The long equity bull market has offset the problem in the post-crisis years, says Helen Bradshaw of Quilter Investors. But a combination of demographic trends, ‘lower for longer’ interest rates, new pensions freedoms, and end-of-cycle market volatility may soon reveal the depth of the challenge.
Are your incomes sustainable?
Helen Bradshaw, portfolio manager, Quilter Investors
Demographic drivers
“We have an ageing UK population* with big expectations about doing more in their retirement”, says Bradshaw, who this summer launched two new income-oriented portfolios for Quilter Investors. Meanwhile retirement is lasting an increasingly long time, with about a quarter of babies now expected to live until the age of 100.** So retirement income must be sustainable. “Today’s retirees also want retirement to come in different shapes and sizes”, says Bradshaw. The percentage of those over 65 still in full-time employment has doubled in the last 20 years,* as more people opt for phased and delayed retirements that blur the line between capital accumulation and income investing. That kind of flexibility is supported by the pension freedoms introduced by George Osborne in 2015. But income investors face a fundamental challenge.
Advisers need to look at how income is generated. Is it reliant on one asset class? How diversified is it?
Sources: *ONS, How Would You Support our Ageing Population, 24 June 2019, http://bit.ly/2lFYFTI **ONS, What Is My Life Expectancy? And How Might it Change?, May 2018, http://bit.ly/2lXNi9u
Traditional approaches to income investing are no longer generating the levels of incomes necessary for longer, fuller retirements. “Before the global financial crisis, government bonds would give you a yield of over 4%, and investment grade might yield over 6%”, says Bradshaw. UK government bonds now offer under 50 basis points, she says. To earn pre-crisis levels of incomes in the post-crisis era, investors and their advisers have had to work harder, be more creative in the assets they employ including alternative assets – and take bigger risks. Those risks worry Bradshaw, as end-of-cycle market turbulence looms. “I think advisers need to look at how that higher income is generated. Is it reliant on one asset class? How diversified is it? And how frequent are the income streams and do they really match the needs of the client?”, she asks. The questions highlight the link between risk transparency and income sustainability. “Two income solutions may look similar on the tin but be quite different when you look under the lid”, Bradshaw says.
Lower longer
The key differentiating factor between many income-producing investments is the degree of diversification, says Bradshaw. It’s the power of diversification that allows risk-averse income investors to tap into some higher-return/higher-risk areas such as private equity. The ability to blend different asset classes allows for a broader range of return drivers within a portfolio, helping to smooth out the journey for clients. But she’s not only talking about diversification aimed at preserving capital – the traditional focus for portfolio managers. “The flexibility of multi-asset also allows us to harness a great variety of income sources, whether that’s in equities or alternatives, investment grade bonds, or from a particular region or investment style,” she says. Her two new portfolios, for example, might be drawing income from a small cap equity fund alongside shorter duration bonds, high yield or investments in infrastructure – a natural hunting ground for income investors given its long-term predictable income streams and typically low correlations to equity markets. “On the flipside”, she says, “multi-asset also gives us the ability to avoid areas where the risk/reward is not so attractive. This in itself is an extremely powerful tool.”
Fixing income
Diversifying income streams makes Bradshaw’s job more complex. But she says that history is clear. “Before the global financial crisis, the UK equity market offered a very nice yield but with this came huge concentration risks because much of the income came from banks,” she says. The crisis then forced many banks to cut or suspend dividends – leaving income investors high and dry. Bradshaw thinks there are now opportunities in UK dividends. “From a yield perspective, the UK is hard to ignore. Nearly 75% of companies in the FTSE All Share now yield more than gilts – a level we have never reached before. Worries around Brexit and the outlook for UK growth have weighed on valuations.” She is aware of the headwinds too, however, and the need to diversify means she also looks to other asset types and overseas. “Global growth is moderating but it’s still at healthy levels”, she says, “and companies in some emerging markets are becoming increasingly shareholder friendly and recognising the advantages of returning capital to shareholders”. She thinks that, “emerging markets also offer significant opportunity for dividend growth.” But income investors need to be careful: some income funds in emerging markets or elsewhere may bias their portfolios heavily towards industry sectors or regions with higher yields, leading to the danger of relatively large sector or country skews. This in itself can lead to concentration risks and lumpy performance. Bradshaw hunts out funds that take a more balanced approach.
Dividend diversity
Shorter horizons make it tough to repair damage
Unlike younger investors saving for retirement, income investors in drawdown typically have shorter investment horizons and this can make it tough to repair any cyclical damage to their savings pots, says Bradshaw. That’s why it’s critical for the investment industry to make the level of risk associated with each income portfolio more transparent. Bradshaw’s two new portfolios come with explicit volatility targets and each portfolio strikes a different balance between a level of monthly income and a degree of capital growth. Bradshaw hopes advisers can use this information to choose the most appropriate investment in relation to their client’s income ambitions, their risk appetite, where they are in their retirement journey, and other investments in the client’s portfolio. Longer lives and more active retirements are something to celebrate. But Bradshaw says investors need more help to negotiate the key trade-offs – or they might end up with lower or riskier retirement incomes than they deserve.
Clearer conversations
Click to watch videos
Can income investing keep up with social change?
How does multi asset provide more stable income?
How does multi asset income benefit from risk targeting?
Watch Helen Bradshaw explore the income challenge
Monthly income portfolios
snapshot
market outlook
The Quilter Investors Monthly Income range offers the choice of two risk-targeted portfolios with differing income and growth profiles to enable advisers to choose the right solution for their clients. The portfolio managers search for the best income opportunities across all asset classes, regions, sectors, styles and investment vehicles and financial instruments.
Quilter Investors Monthly Income Portfolios
Actively managed to ensure the portfolios maintain their risk targets while delivering a sustainable income stream. A core of active investments forms the heart of the portfolios, with passive and smart beta strategies used to provide access to additional interesting and differentiated exposure to income opportunities. Smoothed monthly yield aims to even out some of the variability from income sources, such as dividend payments, to try and avoid large peaks or troughs in the monthly income payments.
Key differentiators:
Active holdings form the core part of both portfolios, while passive and smart beta strategies are used to tilt the portfolios towards the best value and most appropriate income opportunities. This approach allows the portfolios to deliver value to investors, while remaining within the risk framework without foregoing any investment opportunities.
Active core approach
Active core using passive and smart beta to tilt the portfolios towards the best value and income opportunities
Traditional sources of income, such as government bonds or interest on cash, are no longer generating the income they once did. The mix of assets within each portfolio is dynamic to ensure they do not become overly concentrated in one area and can adapt to changes in the market. The managers adopt a pragmatic approach and will adjust exposures using the most efficient investment instrument to access an opportunity – while ensuring the portfolio remains within its risk-targeted framework.
Diversifying income
The portfolio managers search for the best income opportunities across all asset classes, regions, sectors, styles and investment vehicles and financial instruments.
Traditional sources of income
Diversified sources of income
Quilter Investors Monthly Income Portfolio targets a higher level of income with some capital growth, but at a lower risk level. A typical asset allocation might be around 45% held in equities, with the remainder in fixed income and alternative instruments, while a minimum of 35% of the portfolio is held in passive investment strategies, including smart beta.* Quilter Investors Monthly Income and Growth Portfolio targets a higher total return, through a higher level of risk. This results in slightly more capital growth and a slightly lower income yield. A typical asset allocation might be around 60% held in equities, with the remainder in fixed income and alternative instruments, while a minimum of 35% of the portfolio is held in passive investment strategies, including smart beta.*
Inside the portfolios
Source: *Typical asset allocation.
Quilter Investors Monthly Income Portfolio
Quilter Investors Monthly Income and Growth Portfolio
The Monthly Income portfolios are run by the Quilter Investors investment team. The team is headed by Paul Simpson and has a significant depth and breadth of talent, with more than 300 years of combined investment experience among the team members.
Meet the multi-asset investment team – a depth and breadth of talent
Source: **Estimated yield based on launch portfolio. ***The volatility range is a target, based on long term actuarial assumptions and the Fund is managed to stay within this range most of the time. The volatility range is regularly reviewed and may change from time to time due to changes in these assumptions but will remain within the limits laid out in the prospectus.
Paul Simpson, chief executive CEO of Quilter Investors and holds oversight of the portfolio management team
Sacha Chorley, portfolio manager Sacha is a portfolio manager in the investment team and manages Compass and is co-manager of Creation.
Helen Bradshaw, portfolio manager Manager of the multi-asset Monthly Income range.
CJ Cowan, assistant portfolio manager CJ is an assistant portfolio manager in the investment team at Quilter Investors.
Stuart Clark, portfolio manager at Quilter Investors. He has responsibility for the WealthSelect Managed Portfolio Service and is co-manager of Creation.
Hinesh Patel, portfolio manager Hinesh is part of the investment team at Quilter Investors
Paul Craig, portfolio manager of the Cirilium multi-asset portfolios and co-manager of Generation.
Rasmus Soegaard, portfolio manager Rasmus is a portfolio manager in the investment team and manages the Cirilium portfolios with Paul Craig.
Fund research
• The Fund Research team seeks to find best-of-breed fund managers from across the world • Rigorous qualitative and quantitative analysis is conducted • Face-to-face contact with the managers of the strategies is key
Source: Quilter Investors as at 11/05/2019. *Hours of research and number of meetings per year.
Research universe of 50,000+ strategies
17,000 HOURS OF RESEARCH*
More than 1,000 meetings*
10 strong team of analysts
Hover over each team member for details
Annual yield paid monthly
4.1%
Target volatility range
6.5%
9.6%
3.6%
12.7%
***
**
Clients need more sustainable income with more transparent levels of risk
The interview
Helen Bradshaw, portfolio manager
We spent a lot of time speaking to advisers and it turned out they and their clients really needed more sustainable income with smoother monthly flows of income and more transparent levels of risk. So we’ve adopted a truly multi-asset approach to help provide diversification in the returns and in the income streams. We designed two portfolios, each with a different target level of risk, that also help to smooth the income streams during the course of the year. Our conversations with advisers highlighted the benefits of compounding income, so both solutions offer accumulation classes.
What investor challenges do the two new portfolios try to address?
How did your experience as a multi-asset manager help you engineer more stable income streams?
Creating more regular, smoother incomes takes a lot of work behind the scenes. You need to understand the distributions of your underlying holdings, the complexities of different instrument types, and how these can all impact your income streams. We spend a huge amount of time modelling and forecasting the income streams of all our underlying holdings so we can be more confident in the sustainability of what we are offering. My long experience in multi-asset income investing and knowledge of using different instrument types, allows me to harness different income streams wherever they may present themselves, whether that’s through smart beta, derivatives, active managers, or investment trusts. My experience helps me to use the most appropriate instrument type for any given opportunity. On top of smoothing income, there is the job of working out how to diversify the income streams, which is crucial for income-seeking portfolios.
It comes down to diversifying the ways we look for income in the most cost-efficient way. The benefits of active management are well known: there are many excellent fund managers that generate good alpha for clients, for example, in emerging markets. But passive investments can help us fine tune our exposure and keep investment costs down whilst also increasing our toolset, albeit with some key considerations (see Box below).
Why use a core of active plus passive and smart beta tilts?
During a phased retirement people may look to grow their savings while also supplementing their income
Helen Bradshaw Portfolio manager
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You’ll see the same themes and tilts within both portfolios and the commonality of holdings is quite high, but the weightings are different. If you look at the monthly income portfolio, there’s roughly 45% in equity, a similar amount in fixed income and the remainder in alternatives. The monthly income and growth portfolio has the same asset mix, just in different proportions. Given its higher volatility target, the main difference is that it has more risk assets, including a higher weighting towards equity, about 65%, and about a quarter of the portfolio in fixed income.
How different are the holdings in the two portfolios?
Firstly, it’s because advisers helped us to identify two different target risk levels that demanded income solutions. Secondly, we found there was no longer a hard line between investors looking for income and investors looking for growth. In many cases, people want a bit of both, e.g., during a phased retirement they may look to grow their savings while also supplementing their income. That led us to design the income and growth portfolio, where clients can take on a little bit more risk at the expense of some of their potential income and in pursuit of a bit more capital return.
Why two portfolios rather than one?
They blend many different asset classes including equity, fixed income, and alternatives such as property, infrastructure, and renewables. Then within those classes, there are also different regions and styles. So looking at equity, we have truly global exposure with holdings in the UK, Europe, Japan, the US, Asia and emerging markets. But within each region, there is a blend of different styles and opportunities. Taking UK exposure as an example, within that there is large cap exposure with many companies benefitting from international earnings streams. But there is also some small cap exposure too, to take advantage of quality growth-oriented smaller companies offering attractive levels of income. The fixed-income element blends a number of different instruments and exposures: investment grade, high yield, short duration high yield, emerging market debt exposure, and some more flexible fixed-income holdings such as strategic bond funds where managers can move portfolios around to harness opportunities they see in the current changing market environment. Alongside all that, there’s real asset exposure through private equity, infrastructure investments, and renewable energy portfolio funds. So our multi-asset approach involves not just different asset classes, but different regions, styles and exposures too.
What range of assets do the portfolios contain?
Our portfolios have a core of actively managed investments but we also use passive investing tools such as income-oriented exchange-traded funds (ETFs) as a cheaper, more transparent and
Using passives for income investing – Key considerations
Helen manages the Monthly Income portfolios at Quilter Investors. She has over 15 years of investment industry experience and joined Quilter Investors in January 2019 from Janus Henderson Investors, where she ran a number of multi-asset income strategies.
CJ Cowan Assistant portfolio manager
CJ is a member of the investment team at Quilter Investors. He joined Quilter in 2018 from Aberdeen Standard Investments where he worked on the Global Macro team, managing global government bond and global aggregate portfolios.
Long experience in multi-asset income allows me to harness different income streams
often quicker way to achieve our desired exposures. But it’s not as simple as buying an ETF focused on, say, UK equity income. First, we need to get on top of the ETF’s intricacies and focus on how the index is constructed and any sector or country biases it might introduce. These are often a direct result of our desired income tilt. For example, if you pick out the stocks that offer the highest dividend yields in a general index then you are likely to end up tilted towards, say, utilities. You need to be aware of these tilts, particularly at certain points in the economic cycle. Some ETF providers try to neutralise these sector biases so their ETF behaves more in line with the broader market, whilst retaining the income focus. But practices vary so the fundamental question remains: Does this efficient passive investment do what we want it to? Or does it introduce some new bias or complexity that we need to manage?
BUILDING STRONGER PORTFOLIOS
At J.P. Morgan Asset Management, collaborating with our clients in an effort to build stronger portfolios drives everything that we do. We are commited to sharing our expertise, insights and solutions across all asset classes to help make better investment decisions. Whatever you are looking to achieve, together we can solve it.
To find out more please visit quilterinvestors.com/income
CJ Cowan, assistant portfolio manager, Quilter Investors
Helen Bradshaw
Portfolio manager
