PRESENTER: With inflation on the up, the demand for income is high. But is it possible to deliver sustainable income in times of turbulence? Here to answer that question I have Craig Rippe, Head of Multi-Asset, Canada Life Asset Management, and Andrew Morris, Product Specialist, Canada Life Asset Management.

So, starting with you, Craig, you’re Head of Multi-Asset, how would you say multi-asset funds have changed over time?

CRAIG RIPPE: Yes, well, they’ve been around for a very long time, of course, and one of the classic stalwarts was the 60/40 fund, 60% in equities and 40% in fixed interest. And over the last few decades, certainly over my investing career, we’ve seen fixed interest returns have fallen, fallen, fallen again, until last year sometime they were really so low that I think people considered fixed interest more to be ballast for rocky times rather than an actual part of the portfolio that was generating an investment return. And so that was one long-term trend that’s been going on. And at the same time I think that what’s been changing in multi-asset more so than anything is that people have been focusing on customer outcomes.

So, instead of saying you’re just going to have a relatively static portfolio, 0-35% equities or 20-60 or what have you, people have been much more focused on what is it that the customer wants, which is a certain level of volatility. And so we’ve seen a lot more about risk targeting and portfolio targeting for individual customers. And of course one of the things that we’re going to talk about is the Diversified Monthly Income Fund, which was designed not really to generate volatility but to generate income in a very particular way.

PRESENTER: You mentioned there, I mean obviously we’re going back years ago, so the ‘80s, if you were looking for regular income from bonds, you were in a much better position then than now, did we generally see the compositions of multi-asset funds change because of that?

CRAIG RIPPE: Well I think that multi-asset funds have become more specifically designed. So there’s always been a bit in UK, a bit in global equities and a bit in fixed interest. I think that more so people have been focusing on specific asset allocations that can try and get away from very low returns. But really I think that mostly the changes have been coming in terms of focusing on customer outcomes much more than just static allocations.

PRESENTER: So why did you design this fund the way you have?

CRAIG RIPPE: Yes, that’s a good question. So, going back all the way to 2018 and early ’19 when we were designing it, we asked ourselves, what do customers want? And obviously annuities had ceased to become a compulsory purchase and people were looking for retirement solutions. And so we started with, what income do people want in retirement, and the answer came back from our investigations that 4 was a good number. And then of course we say well people actually would prefer it to be quite smoothly paid, and so we came up with the idea that it should be monthly, and not only that it should be monthly but that it should be relatively smooth across the different months of the year. And if you want it to be a smooth monthly payment then it has to be directly invested in securities, not a fund of funds, because that way you get the income coming in constantly through the year rather than just the lumpy fund dividends.

So we’re immediately answering some of the design criteria. And then if you want it to be for retirement, you want it to be quite secure. So you want it to be not too aggressive. So that cut out some of the higher equity risk profiles. And if you want it to be 4% then it had to be enough in risk that you’ve got a yield. So that cut out the lower risk profiles. So you immediately come to the conclusion that this should be a risk profile 4 or 5, a 20-60 type fund, and it should be directly invested in securities, which gives you a smoother income profile. We wanted it to be as spread geographically and economically as possible. So that gave you the asset allocation criteria. And of course being directly invested makes it much more cost effective than being a fund of funds because you’ve cut out a layer of fees as well.

So, we came back to what essentially became the Diversified Monthly Income Fund, which was a 20-60 fund with no geographic restrictions and with a very broad asset allocation within that fund, and from there we designed a portfolio of securities that could pay the monthly dividends.

PRESENTER: So, Craig, these were the aims. Andrew, has the fund been able to deliver that?

ANDREW MORRIS: Yes. If you look back since inception of the range, we’re actually pleased to say it’s achieved everything we were looking for. I think being built at a time where markets were doing very well and then suddenly seeing things like market crashes due to COVID and then subsequent recoveries coming through, it’s been very, very challenging. However, what we set out to achieve and how we designed the fund itself, we were able to show that across multiple different cycles, it’s been able to achieve what we wanted. We’ve been able to pay the minimum monthly payment we wanted to pay every single month since inception. Every 12 months we’ve still been able to increase that amount every single year for clients.

So just by achieving that, whilst still allowing the underlying to have its ups and downs, I’m going to turn around and be the first to admit when the COVID crash came along this fund fell, like everything else. We’re not trying to say that doesn’t do that. But even if the underlying fell with the rest of the market, you were still getting the same payments month in, month out. We didn’t have to reduce like other funds, we didn’t have to remove dividend payments, we paid the same amount, and the underlying has been allowed to grow back up. So, if you look today, whether it be on a total return basis or a price return and taking dividends out of the equation, it has been able to produce positive returns since inception.

So overall we’ve been very, very proud of the fund. It’s been able to do what it achieves. But, as proud as we are, we’d like to think that everyone invested into the fund has never seen a surprise. If their key requirement was that income payment, they would have seen month in, month out, receiving the same amount they expected to, no surprises for them.

PRESENTER: And coming to you now, Andrew. So, as I mentioned, the last few years have been I think difficult, anyone would agree with that. What’s been the impact on these difficulties with income funds and almost demand for regular income as well?

ANDREW MORRIS: Yes, I think over the last few years I think income funds haven’t particularly been in favour, especially since you think the COVID crash that came along, income funds have always been known for paying higher dividends coming through, that’s where the bulk came from, ever since fixed income has been paying low coupons, you’re having to move to alternatives and equities were the big one. But people have realised that with equities comes a level of uncertainty for those dividend payments. So again during the COVID crash, companies were either told not to pay dividends or simply couldn’t pay, and income funds fell off a cliff in terms of dividend payments, which gave greater uncertainty to advisers, to end clients, to be able to say that these income funds are designed to do what you thought they would do. So it has been challenging for income funds, however there’s still a defined place for income funds and I think if managed correctly can still supply that continual income for clients.

PRESENTER: So generally was that income, talking about the whole market, it wasn’t delivered as people would expect it to be, is that what?

ANDREW MORRIS: Yes, I think people believe that a promise was broken when it came to regular income. You know, people assumed if I was buying an income fund I would always get an income, but there’s never a guarantee when it comes to investing, and I think people realise that that an income fund doesn’t necessarily mean you’re always guaranteed a regular income payment coming through and I think it was more of a shock to the system. So, whereas over the last year or so income funds have been doing very, very well, I think people do relate back historically to say I’ve been burnt in the past thinking I’d be getting something which in fact I wasn’t getting.

PRESENTER: I’m just interested on that, because obviously COVID was a very specific kind of crisis, it’s slightly different to if we talk about the financial crisis and things like that. How would you compare the two in terms of how income funds fared?

ANDREW MORRIS: Well, if you do look back, historically, during the financial crisis, income funds actually fared relatively well. Whereas COVID they fared not so well. It’s because of that reduction in dividend payments. When you think, if a company is a quality company, you tend to expect that even when markets are falling, to show their quality and to put a message out to the market, they will continue to pay those dividends. But COVID was, I mean all crashes are different in their own right, COVID highlighted the case that yes dividend payments aren’t ones that, even if you are a quality company, when things go very, very wrong, that’s going to be the first thing that gets cut.

PRESENTER: Right, so maybe it was more fear around we haven’t had a pandemic before, this is something completely new.

ANDREW MORRIS: Yes.

PRESENTER: And coming to you again now, Craig, if we talk about COVID, how have multi-asset income funds fared generally over the last couple of years?

CRAIG RIPPE: Well I suppose what was striking about the response to COVID by regulators was that they took interest rates down to extraordinarily low levels. And so we saw a huge outperformance from growth companies. And although income funds did OK in absolute terms, they did terribly in relative terms during the COVID recovery period, certainly 2021. And so what you would have seen is a lot of income funds were lagging behind their growth counterparties and therefore a little bit out of favour. The fixed interest element, of course, which we’ve touched on, would have been doing quite well relative to normal because regulators took down yields to very low levels and credit instruments therefore rallied quite strongly. But certainly the equity element of income funds got left behind.

I did want to touch on Andrew’s point about quality dividend paying companies, because what happened in the crisis was that regulators panicked rather than companies, and so there was quite a lot of regulatory cancellation of dividends in quite a lot of financial names which otherwise would have been perfectly payable by the companies in question, and so that presented an extra challenge for income funds.

PRESENTER: Was that mainly in the UK or?

CRAIG RIPPE: No, I think banks globally-

PRESENTER: Globally, OK.

CRAIG RIPPE: -were put under pressure by regulators to not pay out dividends because nobody really had a clue how the pandemic was going to exit from a financial perspective. And so a lot of banks were forced or put under pressure to withhold dividends until we had a bit of clarity. And so you saw dividend cuts coming from completely unexpected places because they had strong enough balance sheets and the earnings hadn’t had any impact at the time. So it was certainly an interesting time for income funds.

PRESENTER: And maybe that’s where we’re talking about it being different from other, you know, the reaction as well from regulators and governments, for example, may be different to the financial crisis.

CRAIG RIPPE: Well, what’s interesting about equities and markets in general is that every cycle brings a different twist, doesn’t it, and so when I started investing at the beginning of my career when the tech bubble in the early noughties was just bursting, that bottomed in 2003, I think, with one of the Iraq Wars. We then had the financial crisis not many years later and then we’ve had the tantrum in the middle of the teens and then we had the pandemic. And every one has been accompanied by a completely different type of correction and different type of responses to different types of asset classes. And so it’s a really kind of salutary lesson to remind ourselves that it’s impossible to call what’s going to happen next. I don’t think I can even guarantee the sun is going to come up tomorrow, to be honest, and so you have to find the portfolio that can cope with everything.

PRESENTER: Well, yes, and I guess it’s important if you’re looking at regular income, obviously we can talk about turbulence and difficult times, but obviously there’s different kinds of turbulence so it’s important to see how they fare in different types. So I think it’s always good to have examples if we talk about things. So, for income funds, I’m thinking generally someone who is either retired or maybe they’re wanting to retire and cut down their workload that way, what are their different options in terms of having regular income and how do they compare?

ANDREW MORRIS: Yes, well, I’m going to try and simplify this as much as possible, but you can sort of break it down into three key options. You can go down the natural income route, you can go down the total return route and just drawdown from that return, or you can go do down the annuity route. Now all offer pros and cons between them. When you think arguably the most popular since pension freedoms came along was go down the total return route, it’s you get your growth and then you just draw however much you need. Now the best option for that, you do have the widest choice of investments to choose from, growth has done very, very well, especially since the financial crisis came through, and it gives you the best flexibility, whether a client needs 2% income or 10% income, you can adjust between them.

The problem that you have with the total return approach is that you are very susceptible to certain decumulation risks. So whether it be drawdown, how much does a fund fall from top to bottom; whereas with accumulation, it’s fine. You know, you tend to have your timeframe, you’ve got a long period of time to adjust from it. When you’re taking an income from it, a large fall in your underlying value, and then taking income out has a double effect, and it means that you have to grow your fund even more to get back to the beginning. So this is what anyone investing on the total return approach has to be able to consider - now people call it things like sequencing risk and everything in between.

Annuities, again, pre-pension freedoms were the go-to. You had to use them between them. Most people know annuity rates have been relatively low for however many years now. And unfortunately what may work one year for clients may not work. But annuities do offer something no other investments do. Because it’s not an investment, it’s a policy. You’re guaranteed income until the day you die. So for people with longevity risk or those that potentially live a lot longer, annuities are that natural choice to choose from. The problem people have, and arguably you could say it’s more behavioural, it’s that fear of I’m having to give my entire pot away for a regular income, I’m never going to see that again, I can’t do anything with it, it’s completely gone. And for those that are looking to potentially leave money on for further generations can’t do that with an annuity.

And natural income, it tries to be a mix of both. It tries to offer you some regular income coming through while still potentially looking to get some underlying growth. So, especially for those that are starting to enter part-time retirement as an example, they will still need their pot when it comes to full retirement, but natural income is a way to say look we can pay you some income coming through without touching your underlying, therefore that can still grow. The same as if they want to pass money onto family members when they pass, it gives them that option. The sort of cons with that is what we’ve seen historically you can’t rely so much on that continual income coming through, you do have funds which are more yield above everything else. So yes you’ll get a high yield at the expense of your capital falling.

So it’s trying to get that mix in between to suit the right client when they need because all options can work. Not for every client but for different clients, so it’s being able to assess and pick the right fund for that.

PRESENTER: You mentioned there the pros and cons for both, is there anyone this isn’t for?

ANDREW MORRIS: Income funds?

PRESENTER: Yes.

ANDREW MORRIS: Generally for low risk clients. Again with the likes of fixed income being at all-time, well, not so much all-time lows, relatively low compared to its historical mean, you’re never going to be getting a high level of income. So for those low risk but needing a relatively decent level of income, you know, they’re not going to be able to match a natural income fund, natural income funds tend to take greater risk, so it’s not going to match their risk profile. So, for areas like that, to the same point you can, well, for punchier clients, they could probably, they would prefer more likely total return. Natural income tends to fit that more balanced client overall. If you’re thinking risk profiles, the sort of 4 to 6 base, that’s where it will work the most. Lower and higher, they’ll probably want different options.

To the same point for those that don’t need an income at all, I’d probably argue probably better off going total return. If you’re going to take an income fund which is paying you a regular income and you don’t need that income, unless you’re buying the accumulation share class, you’re going to face having to pay extra taxes and everything on top of taking that income, on top of everything else you’ve got as well.

PRESENTER: I’m going to move now to strategy in times of turbulence. So coming to you, Craig, what has your strategy been for beating inflation?

CRAIG RIPPE: Well, that’s a great question and it’s certainly an interesting time to be asking it as well. The fund that we’ve been managing has been designed to try and capture as many different aspects of the market environment as possible. So fixed interest has obviously been taking quite a beating really in the last six months as regulators and central banks have been pushing rates up really fast. And so one of the ways we’ve been hiding from poor fixed interest returns is through the use of short duration. Another way we’ve been hiding is through the use of high yield where it has got a relatively short duration but it’s also got quite a high coupon - wouldn’t have too much though because it comes with its own basket of risks.

We’ve been running a barbell within the equity portfolio, so we’ve had some growth assets, which obviously in theory are better for inflation-proofing, although maybe not in the last three or six months, and some natural income securities, which have been actually holding up very well because they tend to be in what I call more inflation-proof areas, such as energy and materials and utilities and even to some extent pharma. And so really I’ve just been attacking the problem quite holistically, how can I have as many different exposures as possible to try and cover as many different outcomes as possible, including inflation.

PRESENTER: And did you shift your allocation over the last few years?

CRAIG RIPPE: Yes, well, we launched the Diversified Monthly Income Fund at possibly the worst time you could imagine for an income fund, because we launched it in 2019, just before the pandemic struck, just before a whole series of income paying stocks were forced to cancel their dividends, and just before there was a huge amount of volatility in the market, and I’m really proud to say that the fund actually performed really strongly throughout that period. On the way up, you know, after the COVID crisis had started and growth stocks were performing really well, we managed to find some ways to access good growth and income at the same time. We found some equities that had both yield and technology. We found some securities that had both yield and growth in them. So we found some mandatory convertibles where equities are issuing convertibles. They will turn into the equity so they behave like the equity but they have a high yield. And so we rode the recovery of COVID relatively well. We didn’t give any ground versus our peer group, but I was very disciplined on the way up.

We have a Global Equity Fund Manager who was helping to suggest all of these ideas and he would present me with lots of good ideas. And he’s always the optimistic one. He’d present me with stuff that’s going out really well and we’d take it, but I was the one who would be trimming it all the way along. And so by the time the growth correction came, which started six to eight months ago, we weren’t overweight growth. We’d maintained a balanced approach. I think Andrew’s referred to the fund and income investors being in the middle ground and I think our fund matches that very well. So we were exposed to some growth on the way up, but I was quite disciplined about taking profits as we went. And so when the pullback came this year in growth, we weren’t overly exposed to it and we continued to outperform our peer group.

So that was one of the main ways that we’ve changed our asset allocation that was within the equity portfolio. We’ve also allowed the equity portfolio itself, so at the peak of our weight we had 53% in equities and now we’ve got more like 47- 48% so we did moderate that. And one of the other things we did was to take into account high yield. So high yield is a natural source of income when we launched, but I was a bit nervous of it, and it was only after the COVID correction when I felt it was a good time to be upping our weight there, so we added quite a few percent to high yield across the year 2020. And then another thing we did was to access real estate investment trusts. I quite like real estate because it offers a really interesting set of differentiating characteristics.

So in theory setting aside REITs, the actual underlying asset class which is property has quite a different cycle than equities. And so it’s a nice diversifier for a multi-asset fund, but it comes with its own problems, which is that it’s got illiquidity issues. It’s very difficult to value at certain times in the cycle and you can’t always sell properties generally when you want to, of course, in the cycle. And so you have to be a bit thoughtful about it. And then you can buy real estate investment trusts which give you shares wrapped around property, essentially, and they give you some exposure to the underlying property but they come with a bit more market risk. And I thought that they were a really attractive opportunity, certainly in 2020. So we did add to real estate throughout 2020 and we continue to add to it today actually because I still think that it’s offering a really good inflation-proofing set of exposures to the portfolio. You can still get yields now which are 4 or 5% quite easily, which I feel are predicated on net asset values in REITs that are still quite cheap, still quite big discounts available. So it’s a nice way to hedge equity market risk.

PRESENTER: And you mentioned some nerves around high yield initially. I don’t think you’re the only one to have nerves there. What for you shifted your mindset around that?

CRAIG RIPPE: Well investing in asset classes in stocks is a combination of lots of things. So when we launched in 2019 I felt that high yield credit spreads were very tight and therefore prices were quite high. And so I was just a little bit nervous about reaching for yield in that area because I wasn’t getting, in my opinion, enough bang for my buck. Now what changed primarily was the valuation. So after the pandemic it felt that risk was on a massive tear, spreads had widened a little bit because of the credit crisis, and so I was getting a bit more return and I felt I was going to get more capital growth as well at the same time. Of course now we’re fast-forwarding to what a lot of people think is the beginning or just before a recession and so now we’ve got another set of risks. But spreads have continued to widen quite sharply on high yield, as they have with all fixed interest credit.

And so now we’re at another juncture where we’re having to decide whether or not we like the spread, but we’re obviously running into potentially a recession and obviously high yield will take the biggest default risk during a recession, but we are getting paid quite handsomely for it now. You’re getting a much wider spread and a much higher spread above a much higher risk rate as well in high yield. And so although we’ve taken a little bit out, we’re still running with what I consider to be a fairly healthy weight in it. I think it’s going to be a reasonable way to get through the next year or two.

PRESENTER: Andrew, Craig was mentioning there the decision-making process around various different problems and things like that, I mean obviously you want to deliver income and growth but is there one that’s a key driver for the fund?

ANDREW MORRIS: Yes, well, I think for any natural income fund the level of income is always going to be the key part to us. We always stated within the Diversified Monthly Income Fund we were aiming for a 4% yield. For us though it’s not the yield at all expense. We’re not going to turn around and say that’s the only thing we’re focusing on. You can argue more than just the 4% is the targeted income we’re trying to provide every single month. We’re looking to not just give you whatever dividends we get through any payments, we want to be able to target a set amount so that the end investor knows how much they’re going to be receiving month in, month out. It’s not going to be a surprise. It means that however you much you invest in at the beginning, you know how much you’re going to get moving down the line.

But on top of that we can’t just say that’s it, that’s going to be our main focus, everything else is secondary, because it’s a ripple effect. If you don’t consider all areas, you can end up overexposed, over-concentrated or not even being able to deliver what the end investor is looking for. And this is why we also have a key requirement within the underlying fund that we look for growth. We’re not going to try and say max out as much growth as we possibly can. But to be able to provide growth, which will hopefully cover for inflation, cover for fees, not only will you see the underlying grow, so a pound is still worth a pound 10 years down the line, but that income payment that you receive will grow on top of that as well. Therefore clients have greater belief that their initial investment will still be able to buy the same things five years down the line, 10 years down the line.

Now that does bring along a lot of challenges within the fund. And this is why, not only within the multi-asset team, they rely on every fund manager, every analyst that we have within Canada Life Asset Management to help deliver the best of both worlds to try and work on that growth and end up with a more balanced portfolio.

PRESENTER: Yes and I guess that’s the thing, we’re talking about inflation, is that if it’s a set amount like £1,000 a month or something, that might be great now, is it going to be that great in the future. You know, in terms of that, does everything need to be growth in terms of regular income?

ANDREW MORRIS: No, again, it’s not growth overall, because if you’re aiming for growth then you could potentially miss out on those regular income payments. And this is what the challenge is. It’s not just being able to provide one over the other but try and get a nice balance between the two. We can always potentially up the yield. We can say well instead of 4 let’s go 5, let’s go 6. But the moment you get to a certain level, you’re having to sacrifice other areas. It’s the same point if we said if we’re only looking for a 2% yield. Then our growth would be like any other sort of total return fund, it’d be looking for that overall growth. So it is that balance which helps cover what investors are looking for in regards to income, but at the same point still giving that balance of growth on top.

PRESENTER: So it’s a bit like Whac-A-Mole or something, you’ve got different factors, you hit one and it goes, yes.

ANDREW MORRIS: Continuously, and that’s the thing, as markets change, when you think of a normal market cycle, there are always different areas which will outperform, which will underperform. Times where natural income may be a great area where you can just solely focus on that and it will cover all fields, to the other point where it will be so difficult looking for yield. And really this is what you’re paying for active management for is being able to turn around and say well let’s offset this to the professionals that can manage this on a day-to-day basis and try to deliver that overall balance.

PRESENTER: So, coming now to you, Craig, on strategy, you focus more on UK equities rather than US, why is that?

CRAIG RIPPE: Yes, I think, when it comes to regional equity weightings, we have to be quite careful. Because although it looks like we’re heavily weighted in UK, to my mind the UK is just an index of stocks. And I will go wherever I think there’s value. And at the moment there seems to be more value from an income perspective and more balance in the UK because it has one of the world’s biggest exposures to energy and mining, especially mining. And also it has a historic bias to higher payout ratios or slightly higher payout ratios than the US, where I think there’s tax consequences for high yields; having said that, that’s part of the reason for wanting to be a bit overexposed to UK, another reason is that I want to be a little bit underweight US because I think that the US is not at the best place in the cycle right now.

We’re seeing the US as being relatively expensive to other equity markets at the end of quite a long bull run. The US is the most aggressive in terms of its tightening and it feels like it’s the most tired market. And so we’ve been biasing away from it into other markets, especially the UK where we think it’s undervalued, cheap and it’s not tightening as aggressively as the US, and indeed in Asia-Pac, which is another market we’ll be looking at more carefully in the next few weeks or months to increase exposure, they’re actually still loosening. And so it’s a really interesting dynamic where you can sell an expensive, tightening market and buy a cheap and loosening market and hopefully get some extra relative performance that way.

To Andrew’s point about the design of the fund I think it’s worth touching on, when we put it together in 2019, we wanted a 4% yield, which was a really good starting point, and we knew that investors would want it to be as inflation protected as possible, and we knew that we can’t guarantee 4%, so one of the reasons I wanted to diversify it as much as possible was to reduce our exposure to any one risk. And so we ended up designing a fund which was spread around as much as possible, both in terms of asset class and in terms of region and in terms of the type of economic exposure it was getting within its different underlying assets and indeed within different parts of the capital structure.

So you end up with equities, you end up with investment grade, you end up with convertible preference shares, you end up with senior debt. There are no sovereigns in the portfolio because the yields are not interesting to us. And so we’ve tried to spread the portfolio as much as possible around all the different places with a view to protecting both the inflation protection within the income but also with a view to protecting the capital as much as possible in real terms.

PRESENTER: We’re going to look now in more detail at overcoming the turbulence. So, Andrew, you mentioned earlier that this promise of income had been broken in the past. What makes you confident that you can continue to deliver this 4%?

ANDREW MORRIS: Well I think it’s, I want to highlight there’s a confidence and then there’s a guarantee, and I’ve always been under the one anyone that talks about investments and the word guarantee should probably not be in the profession because there’s never a guarantee with investing. What makes us confident with it is, partly you can say just look historically we’ve probably seen the most quickest market cycle in any period over the last three years. We’ve seen crashes. We’ve seen quick gains in growth. We’ve now come to a slowdown and potentially seeing a recession coming through. And in that shorter period of time with so many changes we’ve still been able to achieve what we started off with. So that’s part and parcel, it’s the proof is in the pudding to that point.

So, the second one, how are we able to do this moving forward? Well again it’s the whole idea of it’s not just one area, it’s not just, yes, we’ve got the multi-asset team that’s doing this, but we’re getting input from everyone within Canada Life Asset Management. And it’s having that great exposure, having people that know each asset class, each region that we’re going through, to be able to give their own individual input. And then it’s down to Craig and his team to then make the call on whether they believe that’s going to suit the income fund or not, and it’s continuously managing it. So we’re not trying to go for the maximum possible yield, because the moment you do that you’ll have to overly concentrate the portfolio; it’s being able to say look let’s come with a respectable level. Which every year we will review to see does that still resonate with the current market we’re in, and that is what helps give the greater, not certainty, but the greater belief that we’re able to achieve this month in, month out.

PRESENTER: So it’s sort of if you’ve survived the baptism of fire of ’19 to ’22 well…

ANDREW MORRIS: We’re hopeful and, again, as Craig had mentioned previously, every recession is always very different. It highlights new things you’ve never seen before. But it’s having that quick response and being able to adjust within there. And unlike, when you think of a general multi-asset fund, you can be a fund of funds, buy other funds within there, this is why we’re so reliant on being directly invested. By being directly invested we can make calls very quickly and be able to move and adjust as the market moves without having to rely on another fund, another reliance on someone else to make those calls; everything is built in-house within the fund itself.

PRESENTER: So, Craig, one of the criticisms of multi-asset funds has been that credit risk, for example, high yield, as some equities are both exposed to that and there’s a lot of allocation to that, how would you say you overcome that risk?

CRAIG RIPPE: I think the large value equities that you’re talking about, you know, things like the mining stocks, things like the oil stocks, they actually don’t have that much in the way of debt at the moment. If you look at them, they’ve been paying off their debt in the last trials that they’ve been through over the last decade, especially the mining stocks. And so although they may be showing a correlation to high yield at the moment, I don’t think it’s something to focus on over the medium term. I think that materials names in particular are going to be generating a lot of growth over the next few years because they’ve been underinvested and they haven’t got much in the way of debt. So we have got some exposure to those. And some of the yields are incredibly generous, to the point that I’m almost disbelieving of them, but I believe they’re going to be a good investment even if I don’t necessarily believe some of the yields are available.

In terms of high yield, it’s an interesting question. We have to look at what defaults are going to be over the next cycle. And the market is divided on that. So some of the market think we’re about to head into a big deep recession globally, in which case you will see credit defaults, especially in high yield. Others are pointing at the fact that we’ve still got an incredibly tight labour market and inflation is actually a beneficiary for highly indebted companies because it devalues their debt in real terms because their revenues grow at inflation and their debt doesn’t.

So I can’t answer the question directly because I can’t forecast the future, but what I can say is that I think having a very well-diversified pot across all the different asset classes has proven to be a very successful strategy and I have no reason to believe it won’t be going forward.

PRESENTER: And just finally, I know you mentioned at the beginning that a lot of multi-asset funds are now driven by the needs of the investor themselves, so just focusing on the investor briefly, how far off retirement should someone be looking at an income fund?

ANDREW MORRIS: I think that really depends on when they really need an income I think is the honest truth. Because again if you don’t need an income you’ve got greater choices to choose from, it’s not just solely looking for an income fund. It becomes especially key once you hit that stage, if you think of it as your retirement journey, once you get to that point of even part-time retirement, if you cut your hours back, but you’re still needing a set level of income, then is a great time to start looking at an income fund, because again if you never have to touch your underlying capital then you can still use that later on in life. To the same point, you can flip it on its head, once you get to a certain stage at retirement where potentially your income needs are less, I mean when you think currently in the marketplace people are asking for 7-8% return when they first hit retirement. Because they want to spend like they did pre-retirement, they’ve got a lot more time that they need, their income needs go up. So that’s probably arguably the hardest point you have to consider how you invest.

But once you get to that point where the income requirements that you have in life, let’s call it the passive stage of retirement, where you’re not going out as often now, but being able to place that into an income fund where again the income alone is more than enough to cover your needs but you start saving the capital. Now some people say with retirement pots, your pension pot is the best for inheritance tax planning itself, it’s the most efficient way. So if you can keep as much of your capital within there, whilst still taking your income, that’s when natural income funds can work really well. On top of that, you do have a number of people that do like income funds as an accumulation option. Forget the fact of I actively need an income, it’s more to the idea if I’ve got a fund which is regularly paying out, even in a down market when market prices are falling, you’ve suddenly got pound-cost averaging back in. If every single month you’re buying back in using that natural income, you can start to pound-cost average so your downside will hopefully be lower.

So there are multiple reasons to use income funds, but it’s not just the simple this will work for this set of people, this will work for others. I think we’ve changed as an industry now where, dare I say, it’s more bespoke to every single client whilst still treating every client fairly and still using the exact same measurements. So you think risk profiles. It’s every client should be risk profiled to a point. When it comes to income, everyone’s income needs are exceedingly different, what works for one person may not work for the other. So what we’re offering here is more of a building block. If we can say look this part of your portfolio will offer you a set level of income, we’re aiming to be able to provide that for you, that should cover your needs on this part, and it’s down to then to advisers, to consultants to be able to turn around and say how do we build the rest of the pot for you. This works as a nice foundation piece.

PRESENTER: So it’s how they use the income is one of the key factors.

ANDREW MORRIS: Exactly, yes.

PRESENTER: So that is all we’ve got time for. Craig and Andrew, thank you so much for joining me today.

CRAIG RIPPE: Thank you.

ANDREW MORRIS: Thank you.

PRESENTER: And thank you for watching.