Rather than denting overall growth, income-focused investing can actually improve overall returns, according to Russell Investments.
With equities unlikely to maintain the growth levels seen over much of the past decade and a demographic shift as more of the population enters retirement, income-focused strategies would become much more important, Russell portfolio manager Scott Bennett said at a Russell Investments summit on Friday.
He said it was highly unlikely we would see the continued double-digit equity market returns of 2003 to 2007, meaning dividends would make up a much larger portion of investors’ overall return. Investors who started focusing on income could be rewarded, Bennett added.
There would also be a “massive paradigm shift” as the baby boomer generation began their transition to retirement and started looking for greater income as they retired, he said.
“Income is a great defensive asset class, or a great way to reduce some of the volatility from your overall portfolio,” Bennett said.
He said income came with a massive growth upside, and compared favourably with a term deposit rate which, although it could provide similar growth to the Australian sharemarket, had a very limited upside due to the capital and interest rate being locked in.
Russell’s Australian shares-enhanced income fund was developed based on feedback from clients who wanted more transparency and certainty from their investments. “Lots of investors got burnt in 2007 and 2008 from highly developed or highly engineered income strategies that were really just a whole lot of derivatives,” he said.
The first objective of the fund was to generate income, aiming for 1 per cent above the Russell Australia high dividend index, which added up to 2 per cent once franking credits were included, he said.
The managers chosen were Ankura and Perennial, which he said were highly differentiated and complementary.
Perennial is a traditional bottom-up stock picker focused on top 100 shares, while Ankura is a fundamental manager that, through algorithms and optimisers, looks for the best income opportunities and focuses on the small cap end of market. The fund also features the Russell high-dividend exchange-traded fund as a passive core of 30 per cent as a risk control, to allow the managers the freedom to pursue income opportunities they would like within the market without having to worry too much about their independent risks, Bennett said.
Ankura’s managing director and head of research Greg Vaughan said the strategy was a response to a lower growth environment that would lead to income being a more significant component of returns in the future.
Because of the maturity of the system, superannuation funds have traditionally been focused on the wealth accumulation phase which is about growth and total returns — but in the retirement or drawdown phase income is more significant, he said.
It was important to dispel the myth that an income bias would hurt growth more than it would enhance yield, he said.
