With capital volatility being a major risk to investors’ income, diversification is the one tool we have at our disposal, that we know is proven to reduce volatility within an investment portfolio.
For investors, ensuring they can invest into a range of traditional assets such as equities and bonds is simply not enough; they also need to make sure you have access to less correlated assets including property and alternative assets such as private equity and infrastructure.
Now that investors need to consider providing themselves with a longer-term income stream, with the new rules suggesting a term of more than 20 years, this should mean they are well-placed to take advantage of the illiquidity premium that is offered by such alternative assets. These assets tend to deliver higher income streams with less capital volatility.
It is important to consider their illiquid nature, but holding these for the longer-term does bring considerable benefits, in particular the benefit of a stable income stream. Another interesting concept to be factored in is pound cost averaging. When someone is saving towards their retirement, pound cost averaging is a very useful technique. It allows savers to take advantage of buying into the market once it has fallen and effectively means they get more for their money.
Conversely, in the income phase of their investment life, following the same route is disingenuous. The requirement here is for steady and growing capital, not volatile capital. Taking income once the market has fallen effectively means the need to sell more of your portfolio to generate the required amount. This can quickly erode the capital value of the fund and would also put pressure on the income that portfolio could produce.
Well-diversified portfolios containing assets which are less correlated should produce less capital volatility and, therefore, build in some protection against the downs of investment markets.
The changes to the way people will manage their money in retirement means income generation and portfolio or fund performance is effectively becoming more personal, and investors’ requirements essentially becomes the benchmark for their advisers and fund managers.
As an industry, when we talk about “alpha” we mean “investment alpha”, but clients increasingly want “investor alpha”. Put simply, they are interested in what the fund does for them and how it helps them meet their own investment goals.
Clients’ goals are regular income or capital growth, protection against market falls, protection against the impact of inflation on their spending power and importantly to have a noiseless investment journey.
While this does not necessarily mean that fund managers need to build personal funds for investors, it does mean there is a need for greater clarity about what the investor should expect from their investment. This should help advisers to retain their clients’ interest and involvement in the portfolio. An engaged client is, of course, a valuable commodity.
