Income funds versus capital growth
But not all in the industry agreed that natural income strategies are the best way to avoid sequencing risk.
Alistair Cunningham, chartered financial planner at Wingate Financial Planning, says he believes in a “world of a diversified multi-asset portfolio with the intention to achieve total positive return.
“Whether that comes from income or capital growth should be irrelevant.”
According to Mr Cunningham, if only income strategies are used to mitigate sequencing risk then investors can miss out on the opportunities and tax allowances [posed by capital gain strategies].
Unless there is a specific requirement for income as a must, most people are better suited with total return strategies, he adds.
Mr Cunningham explains: “There are some emerging markets, where income would be lower than some shares. [That does not mean] one would exclude them and miss out on capital growth strategies.”
Nathan Harris, chartered financial planner at Lothbury Group, disagrees with this view.
He says income funds have lower volatility than equity funds because of the presence of yields.
“A monthly dividend works better because they don’t need to sell capital units each month.”
He dismisses the idea that companies may struggle to offer dividends in tough economic times.
“A company that is able to pay dividends is likely to struggle less than a growth fund with no yield which would struggle in a recession,” he says.
But Mr Harris warns that investors adopting income strategies often comes with a “style bias”.
“Many suggest that investors are better off with income funds.But it also means that you have a style bias and more valued approach.”
saloni.sardana@ft.com
