Hunter Aitkenhead & Walker
For the past six months, the fall in yields has led Leicestershire-based Hunter Aitkenhead & Walker to manage its clients’ expectations about income, according to director Alasdair Walker.
‘Previously, we said 4% was a reasonable expectation of sustainable income,’ he said. ‘That is now closer to 3.5%, reflecting the gradual reduction in average yield of the FTSE 100. As well as the increase in valuations, we think this is due to reduced pressure on UK companies to provide yield because it is so low in other asset classes such as cash and gilts.’
Walker said that, based on a total return approach, good investment performance over the past two years had offset this yield reduction. But, given heightened political and economic uncertainty and his prediction of stodgy growth over the next four years, this cushion may no longer be available.
The firm has responded by looking beyond the FTSE to a more multi-cap approach. Though this adds volatility it also adds a crucial level of diversity, said Walker. He said another response to lower yields had been to focus more on investment costs, by moving towards tracker funds.
‘For example, Invesco Perpetual Income has a yield of 3.1%, but Vanguard FTSE UK All Share Index tracker yields 3.5%,’ he said. ‘We have been switching into Vanguard and have reduced costs by around 0.8% or 0.9% without giving up any yield. In a low-growth environment, this can mean a lot.’
Just before and immediately after the Brexit vote, Hunter Aitkenhead & Walker sold most of its large commercial property holdings, before the funds were suspended. It also bought into government bonds or strategic bonds in income portfolios.
Walker said the only response to current uncertainty was to take a neutral stance and ensure your portfolio was as diversified as possible. ‘We don’t know what events in the UK, US and Europe will mean for investments,’ he said. ‘We were using commercial property as a bond proxy, but now we have moved back to a more mainstream approach.’
He said he had observed a general move among other planners towards a total return model for income, rather than just seeking yield. ‘There have been attempts to get yield above the market, but we have seen advisers and wealth managers burnt by going into emerging market instruments, for example, looking for yield,’ he said.