For multi-asset income investors, striking a balance between finding sufficient income without impacting your capital is a perpetual challenge. Using anonymised examples from our peer group, we consider potential pitfalls of different approaches and show how we believe these can be avoided.
Income at any expense
Some income approaches focus on income at any expense. However, this can lead to poor customer outcomes – and clients might not be aware that while they are receiving income their capital is being depleted.
Source: Canada Life Asset Management and Morningstar as at 31 May 2024
Some income approaches smooth the income. This is typically more attractive for clients in decumulation stage. Despite the smoothing effect, this can still look like income at any expense:
Source: Canada Life Asset Management and Morningstar as at 31 May 2024
Sometimes this represents smoothing over the cracks of capital losses. In our view, an investor is better off buying a bond or annuity in this scenario.
Sporadic income and low (or no) capital return
Some income approaches struggle both to generate smooth income and generate capital returns:
Source: Canada Life Asset Management and Morningstar as at 31 May 2024
The investor lesson from all this is a need to understand what the capital upside is from any investment. We don’t recommend measuring success purely by income payments received – whilst important, if the capital is being eroded then we believe that you may as well buy a bond.
Striking the balance: a good all-rounder
Source: Canada Life Asset Management and Morningstar as at 31 May 2024. Morningstar data is bid to bid, with income re-invested, for C share class to 31 May 2024. Sector: IA Mixed Investment 20-60% Shares.
Unlike many traditional income funds, the WS Canlife Diversified Monthly Income Fund pays out a steady income each month (effectively a smoothed distribution), allowing investors to budget with greater certainty. To do this, the fund sets a targeted monthly income per unit each year so, no matter the price of the underlying fund, the dividends aim to be consistent on a pound value each month.
Important information
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate.
This page is issued for information only by Canada Life Asset Management. This page does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk
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