Choosing the right fund
With the number of multi-asset income funds available to investors now so vast and expected to swell further this year, how should advisers go about picking the right one?
Mr Aird says: “There are two golden rules: that the income a fund delivers should be realistic and that it has the potential to grow over time.
“What we don’t like is eye-watering artificial income that is generated at the significant risk of capital. It may seem terribly attractive to generate a yield of between 7-9 per cent, but if you look at what is being generated by the main asset classes at the moment, then any solution offering 7-9 per cent yield is definitely taking excessive risk.”
By way of example, the Investec Diversified Income fund has a yield of 5.5 per cent, which Mr Aird considers to be “realistic if you look at the underlying assets”, made up of good quality equities with reliable dividend streams such as Vodafone, Nestle and Unilever, Malaysian, Turkish and Mexican government bonds, and high yielding corporate bonds issued by companies such as Ladbrokes.
“We are trying to align the income product with the realistic needs of the underlying investor,” he adds. “If we carefully manage those different buckets, we can generate a yield that is just over 5 per cent and if you compare that with cash yields, it is good.”
Matching returns to risk
The main risk for advisers, according to research carried out by eValue, however, is that they are in danger of making unsuitable investment recommendations by not matching funds with their clients’ risk profiles.
Bruce Moss, strategy director of the software provider, explains: “The problem is that the relative riskiness of different types of asset does not vary consistently with investment return – cash deposits become more risky as investment term increases, whereas equities become relatively less risky and the riskiness of a bond fund initially falls and then starts to rise as term increases.
“What this means is that the riskiness of multi-asset funds relative to one another will vary with term according to the makeup of the fund, for example, the relative weightings of equities, bonds and cash.”
Risk profiling is something that the Financial Services Authority recently waded in on, warning advisers of the dangers of risk profiling and in response many advisory firms have set up risk-rated centralised investment propositions, or CIPs, using multi-asset funds and model portfolios aligned to the output from risk profile questionnaires.
Mr Moss, however, argues that these risk rates CIPs need to be “term dependent”.
He adds: “Worryingly, rather than do this, many firms have set up single solutions for each risk profile and applied the same adjustment to these different solutions to take account of term – usually increasing the client’s risk profile as term increases.
