Perspectives: Income as an investment output not an investment style

For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

In this our second in our series on investing for retirement income we discuss portfolio construction for an income focused fund and why we see income as the output not an input.

Running income

Most fund managers running income strategies conceive of income as an investment style, they believe that by favouring higher yielding shares, that may give them an investment edge over time. That has certainly been true for various periods in the past, although in recent years growth has been the dominant style. With growth outperforming income for an extended period, even income managers tended towards a greater growth bias, and the Investment Association (IA) obliged by reducing the income requirement on the income sectors.

When running the Premier Miton Cautious Monthly Income fund we do not see the job as running a fund with a bias towards higher yielding shares and bonds. We certainly do not target a yield for the fund. We see income as the output on the fund not an input. The output we are seeking is not yield per se but an income stream that grows in line with inflation over time.

This allows us the flexibility to invest in any asset class or region to meet the fund’s overall objective, so long as the income and risk requirements are met. We do not even limit ourselves to equities and bonds and are happy to include such assets as commodities, even though they do not pay any income.

Flexible thinking

Over the past decade or so this flexibility has served us well as growth as an investment style has been performing well, while income has lagged. By having the flexibility to invest in growth sectors and themes we have been able to earn positive capital returns while still generating income. Indeed, it is difficult to grow the income stream over time if the capital value of the fund is not also growing for obvious reasons.


Going forward we do believe now that bond yields may be at more normal levels and inflation is back to stay, income as a style may again perform well. The previous decade or so was highly abnormal, particularly post global financial crisis. Rates were held abnormally low, and inflation was not an issue. This led to an environment where bonds and equities became negatively correlated and yields consistently fell. Portfolio construction in this environment was relatively straightforward: combine growth equities with long duration bonds and all is well, during weak equity environments your bonds might bail you out.

A different approach is required

Now markets are back in a more typical regime, equities and bonds are positively correlated and weak equity markets are more likely to be associated with periods of higher inflation, rather than deflationary recessions. In this environment a different approach may be required to construct an income portfolio.


Bonds are no longer a hedge to equity, although they do have a role for income. The better hedge would be inflation beneficiary assets such as oil and commodities, as well as hard asset-based businesses in equity and property. Combining these with our growth themes equity may be be a less volatile strategy going forward than the more recently favoured 60/40 equity bond mix.


The positive side of this is that in this more inflationary environment, income as an equity style may perform well. Income generating equities are often in sectors that benefit from inflation, which have in most cases fallen out of favour in the past decades. Energy, materials, industrials and property all spring to mind as both good income generators and also good inflation beneficiaries.

Construction adaptation

History would suggest that if current conditions persist that not only may a growing income be an important demand from clients as inflation bites, but that income strategies may perform well compared to the recently favoured 60/40 and growth biased approaches. Portfolio constructions may need to adapt, but this could very much favour an unconstrained income style.

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Risks

The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on the information contained within.

Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.

The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

Reference to any particular investment does not constitute a recommendation to buy or sell the investment.

A free, English language copy of the Prospectus, Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or copies can be requested by calling 0333 456 4560 or emailing [email protected].

Financial promotion issued by Premier Portfolio Managers Limited. (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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“US Person” generally includes the following: (a) any natural person resident in the United States; (b) a partnership or corporation organised or incorporated under the laws of the United States; (c) any estate of which any executor, or administrator, is a US Person; (d) any trust of which any trustee is a US Person; (e) any agency or branch of a non-US entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) for the benefit or account of a US Person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated or (if an individual) resident in the United States; and (h) any partnership or corporation if: i. organised or incorporated under the laws of any non-US jurisdiction; ii. formed by a US Person principally for the purpose of investing in securities not registered under the 1933 Act. In addition, a Shareholder must qualify as a “Non-United States Person” as used in the US Commodity Futures Trading Commission (“CFTC”) Rule 4.7.

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The information in this site is solely for the purpose of acquiring information as, or for, an Institutional Investor (a corporate or other non-retail investment professional acting for their own account). This information must not be used or relied upon by anyone that may be considered a “retail investor” by the home regulator of the country from which this site is accessed.  

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Premier Miton Investors has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

Neither Premier Miton Investors nor any of its group companies or affiliates accepts any liability for any losses arising directly or indirectly from any information accessed from this website, to the fullest extent permitted by law.

By clicking accept you acknowledge that your use of this website is subject to our privacy policy, cookie policy and our general legal and compliance information available on our website.

THE UNITED STATES OF AMERICA: The investment products referred to on this website have not been and will not be registered under the United States Securities Act of 1933, as amended. They may not be offered or sold in the United States of America, its territories and possessions, any State of the United States of America or the District of Columbia or offered, sold or transferred to US Persons (as defined below). The investment products referred to on this website have not been and will not be registered under the United States Investment Company Act of 1940, as amended. Premier Portfolio Managers Limited has not been and will not be registered under the United States Investment Advisers Act of 1940.

 “US Person” generally includes the following: (a) any natural person resident in the United States; (b) a partnership or corporation organised or incorporated under the laws of the United States; (c) any estate of which any executor, or administrator, is a US Person; (d) any trust of which any trustee is a US Person; (e) any agency or branch of a non-US entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) for the benefit or account of a US Person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated or (if an individual) resident in the United States; and (h) any partnership or corporation if: i. organised or incorporated under the laws of any non-US jurisdiction; ii. formed by a US Person principally for the purpose of investing in securities not registered under the 1933 Act. In addition, a Shareholder must qualify as a “Non-United States Person” as used in the US Commodity Futures Trading Commission (“CFTC”) Rule 4.7.

 Investment products referred to on this website may not be sold or transferred to a US citizen, or an entity taxed as such or required to file a tax return as such under the United States federal income tax laws (a “US Tax Resident”). If those investment products are held by a US Person, a US Tax Resident or a person who does not qualify as a “Non-United States Person” within the meaning of CFTC Rule 4.7, Premier Portfolio Managers Limited shall be entitled to redeem such Shareholder’s entire holdings.