Awarding a risk rating to a multi asset income fund based solely on the volatility of its capital misses the point when a retiree’s main focus is on receiving its dividend income says Paul Ilott, Managing Director at Scopic Research.
Our sole focus at Scopic Research is on researching multi asset funds, and below we show the difference between the volatility of a multi asset income fund’s total return and the volatility of its income paid as dividends per share (or unit).
We’ve used data for one fund in a small multi asset income cohort that we’ve identified and named as ‘Retirement income champions’.
Funds in this cohort have all been specifically engineered to generate stable monthly dividend income throughout the year and to grow the total of dividends paid year on year.
They’ve been remarkably successful in doing this. Think of this as being as close as we can get to receiving a replacement salary from an investment throughout retirement.
The funds we’ve identified in this cohort include Baillie Gifford Monthly Income, BNY Mellon Multi Asset Income, Keyridge Diversified Monthly Income, and Premier Miton Cautious Monthly Income.
As the chart demonstrates, volatility of a multi asset income fund’s total return isn’t the same thing as the volatility of its dividend income per share, and yet the former is what we’ve become accustomed to using to describe its risk rating.
We believe this needs a rethink.
Using rolling 12-month data, as we’ve done here, is the best way to depict volatility of capital versus volatility of dividend income.
Here, the fund pays its dividends monthly. During each accounting year, ten of these payments are of equal size (the dividends paid per share are the same) and the remaining two dividends – paid in May and June – are usually larger payments that sweep up the fund’s remaining income so that it can all be paid out during the accounting year that it’s received in.
Each bar in the chart represents the total of all dividend income paid per share in the previous 12 months.
The slight undulation in the height of these bars is due to the sweep up balancing payments and that the remaining monthly dividends per share become larger in each subsequent accounting year.
The performance line simply shows the fund’s rolling 12 month total return.
This presents us with something of a conundrum.
When recommending funds in the ‘Retirement income champions’ cohort, perhaps we need a new way of looking at risk that focuses more on the reliability of the income stream and less, or perhaps as well as, on the volatility of total return.
It may be worth considering what a retiree considers most important. The relative reliability (and when it comes to our cohort, relative predictability) of the income stream, or the pattern of returns on capital.
The chart and some of the text is taken from the Scopic Research White Paper, “Retirement income champions and the safe withdrawal rate.”
The full paper is available from the Scopic Research website at www.scopicresearch.co.uk. (Simply register for free, login and go to the Adviser Toolkit Page).
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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