Faced with plentiful headlines about underfunded pensions or potential changes to the tax system for pension pots, retirees can be understandably confused when all they want is a steady, resilient income stream to fund a comfortable later stage of life. Traditional sources of such income have dried up since the global financial crisis more than a decade ago, and this has been exacerbated by COVID. The policy response from governments and central banks accelerated pre-existing trends and pushed interest rates to previously unthinkable levels as central banks doubled down on using ever-looser monetary policy in an attempt to protect the economy.
Retirees now face very limited options with respect to defensive assets, such as cash and developed market sovereign bonds, which historically have been the go-to allocations. Even high yield corporate bonds now offer very little income. In addition, given the fiscal support for lower unemployment, central banks trying to stoke inflation and the likelihood of pent-up consumer demand being unleashed as we gradually return to normality, there is a reasonably high probability of an inflationary scenario transpiring, especially in the US. Against a backdrop of low yields and possible inflation, we believe the future for fixed income assets and their ability to provide income is bleak.
To navigate the environment ahead, we think it is important to cast the net wide and take advantage of a broad multi-asset opportunity set. For example, we see compelling opportunities in high yielding equities whose dividends are underpinned by strong cash flows. As the world recovers and returns to normality, these cash flows can rise, which in turn can fund distributions to investors. Fixed income isn’t completely barren, but it is crucial to be selective, focusing on those yields that are backed by resilient cash flows and compensate for the level of risk taken. Crucially, given the less reliable diversification and returns offered by traditional fixed income assets, the need to manage risk at a portfolio level is paramount.
For those investors seeking a stable, defensive income stream – often the core objective of retirees – we’d encourage them to look across the whole market for the best opportunities, be flexible enough to take advantage and be able to weather less stable market conditions.
Given the weak fixed income outlook, and equities reaching ever more lofty valuations that are vulnerable to correction should the road to recovery disappoint, the outlook remains uncertain. For those in retirement, it is important to protect underlying capital and draw a sustainable income from it.
The value of an investment can fall as well as rise and isn’t guaranteed. Your client could get back less than they invest.
Performance and volatility targets are subject to change and may not necessarily be achieved, losses may be made. Past performance is not a reliable indicator of future results. The amount of income may rise or fall. The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the Fund's prospectus.
About the author
John Stopford, Head of Multi-Asset Income, Ninety One
John is co-portfolio manager of the Multi-Asset Income strategies and has macro focussed research responsibilities. During his time at the firm John has held senior positions as Co-Head of Fixed Income & Currency, having previously been responsible for the management of our South African fixed income assets from 1998 to 2004.
John joined Guinness Flight in 1993, which was later acquired by our firm, and took responsibility for investments in emerging bond and currency markets. Prior to this, he worked in London and Tokyo as a specialist global bond and currency portfolio manager for Mitsui Trust Asset Management.
This is an advertising communication for institutional investors and financial advisors only, and not for public distribution.
Ninety One has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.
This communication is not an invitation to make an investment nor does it constitute an offer for sale. Any decision to invest in the Fund should be made after reviewing the full offering documentation, including the Prospectus, which sets out the fund specific risks. Fund prices and copies of the Prospectus, annual and semi-annual Report & Accounts, Instruments of Incorporation and the Key Investor Information Documents may be obtained from www.ninetyone.com.
Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2021 Ninety One.
The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on treated as a substitute for specific advice of any kind.
We make no warranties, representatives or undertakings about any of the content of this website; including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.
Although we make reasonable efforts to update the information on this site, we make no representation warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.
Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.