Income investing: Why it’s more vital than ever

Pension freedoms will make the search for income even more important for investors
GIVEN the relentless media attention that record low interest rates have received over the past couple of years, I was genuinely flabbergasted to learn that less than half of UK investors (just 44 per cent) could correctly explain the term “income investing”, according to a recent survey conducted by JP Morgan Asset Management. It seems to be the case that, while many investors acknowledge the importance attached to generating income for their portfolios, too few actually know how to achieve this outcome.

This is a huge concern and alarm bells should be ringing across our industry. Sourcing a reliable income from investing is set to become even more important and prevalent as pensions freedoms come into force this year and the current environment of low yields and high volatility continues to complicate investors’ hunt for income. This knowledge gap needs to be addressed immediately so that people can make confident and well-informed investment decisions.

We are also still seeing far too many UK investors – a worrying 38 per cent – relying on savings accounts as their “preferred” source of income. Like it or not, this route only helps to leave investors exposed to often below inflation rates of return on their hard-earned cash. Many of these investors would be so much better off taking a simple step back and considering how to make their money work harder for them. That is where advisers can play a pivotal role, seizing the opportunity to do more to help educate clients about how to use mutual funds to generate some much-needed income.

In spite of this obvious opportunity, however, our survey findings also reveal that 79 per cent of UK growth investors have never been approached by their adviser to discuss income-generating products. This strikes me as a worrying trend. It will definitely not help correct the UK’s current knowledge gap – even when, compared to their European counterparts, Britons’ awareness of mutual funds as an investment option is above average.

Needless to say, generating income in today’s world, especially for retirement investors, is a multi-faceted challenge. The income opportunity set has to be broader and more global than ever before, as traditional sources of income can no longer be relied upon. Risk needs to be carefully managed to prevent the potential loss of future wealth. At the same time, accessing competitive market returns to grow assets is equally important, to ensure investors do not run out of money in the future.

Solutions such as multi-asset income funds, which are able to combine a diverse range of asset classes, are well-positioned to provide investors with strong risk-adjusted returns. They bring diversification to portfolios without investors having to chase the assets themselves. Such funds balance the provision of sustainable income and the management of downside risk, while concurrently focusing on achieving capital appreciation. Most are easy to understand, accessible, and lack complex and expensive guarantees. They also tend to be flexible and tax efficient, as well as cost efficient. All in all, multi-asset income funds offer investors the potential to build and preserve wealth, beat inflation, and reduce the risk of outliving one’s assets.

Overall, our survey has shown that a lack of knowledge and familiarity is seemingly hampering the search for income among UK investors. Advisers should be stepping up to help close the education gap, whether through talking to their clients about the shortfalls of traditional income sources, showing them the power of dividend investing over time, or demonstrating the importance of diversifying their sources of income.

Jasper Berens is head of UK funds at JP Morgan Asset Management.

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