Speaker 0:
Hello and welcome to this natural income masterclass with the team here at Premier Might and joining me in the studio. We have Joffe Wilcox, global Health Distribution and fund managers. Emma Milford, David Jane and Java Williams Joy. I'm gonna start with you. Could you set the scene for us here and just tell us how important

Speaker 0:
natural income is? And some of the issues Maybe that advisor and investors have faced at the moment. No, thank you, Roy. And I think what I've noticed going up and down the country for the last few weeks and months is talking to advisers how they're thinking about natural income, how they're thinking about planning for retirement and building those retirement income portfolios for their clients. And if you think about the investable wealth in the UK, you know, according to the O. N f statistics, 85% of the investable wealth in the UK is owned by those aged 50 and above.

Speaker 0:
But that wealth is not just it's not effectively just owned by the older generation. That wealth has been owned by the same generation that just got older over the last 2030 or 40 years. So essentially our entire industry. Asset management and advisors have effectively been focused on the growth phase, the accumulation phase that we all know and love that particular phrase. But now we've got this huge swathe of investors in the UK thinking about retiring, retiring or already retired.

Speaker 0:
Now what we've noticed in the last 10 or 15 years because you've been focused on the accumulation phase. Most of the advisors that we know obviously have their central investment propositions, and they've been focused on generating growth. And as those plants have begun to pass into retirement, it's made natural sense to take some of that growth off each year, doing unit in cash and effectively top up the income pot. As a consequence of that particular action,

Speaker 0:
the problem we've got today is that again, if you go back to some of those government surveys, many people would also believe they'll retire, be retired for at least 20 years or more. So that's an important thought to have to bear in mind as well now, in a world that we've been for the last 10 or 15 years, pretty well since the global financial crisis, many investors have been enjoying returns of 5 10 15% per annum on their overall portfolio

Speaker 0:
and then by taking 5% income from that, they've still had capital growth. But if you live in a world that we've just been through in 2022

Speaker 0:
then suddenly you have a different scenario on your hands. So I think the two things that advising to think about today is sequencing and thus longevity risk. And if I just summarise that very quickly, the sequencing risk is that if you have £100,000 portfolio and you need to generate a £5000 income, if your portfolio has gone up by 10 or £15,000 per annum, taking £5000 out is absolutely fine. You've not had inflation. You take the same 5000 out every year and your capital has gone up.

Speaker 0:
But after what happened in 2022 if you take £5000 income out for you in cash and you've had a drawdown in your portfolio as well because of capital loss from financial market moves, suddenly you could be down at £90,000 a 5% drop taken the 5% income and now you're at 90. But because inflation is now with its ugly head again, you need more than £5000 next year of income. But you're trying to get that off of a of a lower capital base.

Speaker 0:
And if you keep doing that on a regular basis, you have a serious danger that you will run out of money before you die. Which is the longevity risk element of this and most advisers that I'd look at today have, as I said, the central investment propositions. They're all focused on growth. They risk reward and categorise each of their clients. But when you get into retirement, everybody's needs individually are different.

Speaker 0:
So the risk is that if you rely on unit and cash to generate the income you need in retirement, you're very dependent on what is going on in in the capital returns of your overall portfolios.

Speaker 0:
We believe that the smarter thing to think about if you can generate an income in of itself off your underlying pool of assets and that income needs to grow in line with inflation or at least keep pace with it,

Speaker 0:
and that your capital doesn't erode relative to inflation as Well, then you don't have to worry about what the underlying capital is doing. Effectively the income stream will look after itself. So I think we believe very much so that natural income is the most sensible route going forward when you're thinking about central time of propositions, really going into the purpose of

Speaker 0:
I need to generate retirement income. But if I can do it from a natural source, then I don't have to worry about what the capital market and the capital value of my portfolio is doing. And staying with sequencing risk is there are the issues or the sort of risks around that more keenly felt in the run up to retirement or sort of maybe in the years just after. It's just in the immediate years that when it can be both both just before or just

Speaker 0:
after, but when you start to take and I I I don't like the word drawdown, and I don't like the word accumulation because if you start getting that wrong early doors, so if your first two or three years after retirement and you've taken your 5% income and you've had a market full of five or 7% and you repeat that for two or three years. Suddenly your capital is down at potentially 85 or even 80,000, down from the 100.

Speaker 0:
But with inflation, you don't just need £5000 anymore. You might be needing 6000 or £7000. And now, suddenly the yield requirement has gone from five to potentially 89 10%. And if you start that for two or three years, you put that whole pressure on, and then you will. You will, As you do the modelling, you'll start to find that your your capital doesn't last for long. As you live, you will run out of money before before you die. And I think that's a serious risk for longevity.

Speaker 0:
Uh, Emma, welcome to the programme. Um, same with longevity. Risk there. I guess investors are faced with the nightmare scenario that they retire and then they they run out of money in the end.

Speaker 1:
Yeah, I I I mean, I think this is something that is a new thing that we need to to think about. I think there has been a regime change if we look back. Um, as Sophie said, since the the global financial crisis the last 15 years or so, Um, we've been in this wonderful market of ever lower interest rates,

Speaker 1:
Q E pushing up asset prices. It's been this great environment where where growth, um, has has has driven, um, growth stocks higher and and and valuations on equity markets ever higher. And and that's a great environment to to be selling units, uh, to generate the income you need.

Speaker 1:
I believe that the next decade is going to look quite different to the decade that that we've just been in. Um, I think interest rates will be higher, you know, not going back to the ultra low levels, um, that we've seen. Indeed, I think people forget that actually, in the decade prior to the G f c. You know, the average interest rate in the UK. Was was around 5%. Um, you know, that was normal. Um, and actually, if we're going back to that sort of normal again, then we need to think about

Speaker 1:
how we generate returns for clients differently. Maybe it's not, you know, a portfolio chock a block with growth stocks. Um, maybe it's not a portfolio chock a block with stocks. Um, you know, outside of of the UK. So for me, you know what UK income funds can offer to clients. Is this level of income? Um, over over time? Looking back through history, that income has done a good job of of rising in line with inflation.

Speaker 1:
We can meet that criteria for clients. Um, and and the capital can grow as well, so that when you know when they get to to to end of life, hopefully you know, they've They've maintained and grown that capital and also, um, have that income that they need to to, um, to live on in in retirement.

Speaker 0:
And David, Hello to you. Um So is this perhaps a symptom of the IFA market in general? What's the way in which these portfolios are set up? Always for accumulation and never really looking at income.

Speaker 0:
I think it's It's a It's a function of history, actually, of of of, you know, the the emergency IFA industry.

Speaker 0:
If you think about my generation, the generation before me and some of my generation, they all had final salary pension schemes that was the norm, and and so IFA s were dealing with the additional stuff around the edge. You know, they they were dealing with P. P s, which then became I SAS They were dealing with mortgage and protection and things like that. And the savings pool that they were looking after wasn't the bulk of the consumer savings. It was

Speaker 0:
the peripheral savings and therefore products were developed, which were exciting and interesting, growth orientated. And this that and the other with pensions, freedoms.

Speaker 0:
And, you know, my generation coming through, we've all had money purchase pension schemes. The IFA. S are now dealing with a generation where they've got the bulk of the client's assets.

Speaker 0:
And those needs are now in income in retirement that there's a huge hump of people coming through now who are reliant on IFA s advice for incoming retirement.

Speaker 0:
And, of course, the industry. Our industry hasn't really adapted to this changing environment yet, in my view, you know, there are there are not enough products, partly from because of what Emma said, You know, obviously, performance was all from growth stocks in the last decade, not from incomes stocks, not from growing an income stream in a portfolio with huge capital growth. You didn't need to worry about income. Now not only must IFA worry about income because their clients are moving into post retirement,

Speaker 0:
but the industry must worry about income products as well and produce the products for those those IFA s to give them. You know what they need and last but not least, welcome to the programme. And what about fixed income? What does fixed income come in here, especially when we were looking at and looking for retirement income? Where does that play a part,

Speaker 0:
I think with fixed income having so highly valued with such low yields in the past, clearly it wasn't a very significant asset for many clients. They they came out and reduced that. I think now that you've got fixed income it it can be a source of return. But most particularly, it can also be a source which is less correlated with equity market. So there's an opportunity for less correlation. But I think there's a much bigger issue to be less correlation. So many clients have got quite large ratings in assets which are very volatile, that they perform very strongly when markets

Speaker 0:
prices they come down more rapidly where markets fall, and those kinds of products need to be balanced with equity income and particularly income from quoted companies. You know, the the equity income funds, and I think those are relatively lightly weighted in clients. From what you've heard today, they're going to become more significant ratings in a way, by moving early, you're getting in at a lower valuation, and particularly you get this kind of compounding where the income comes through. But actually because other investors will be coming into them, too, you may find,

Speaker 0:
and the valuations rise as well. I think this is going to drive. UK outperforms versus international markets. For the last 30 years, largely the UK market has been just interesting. But just to diversify, really, you should be putting your capital into international markets. I think this feature is actually going to drive the UK market specifically to outperform most international markets because of its income bias. And on top of that, as that occurs, of course, more people will want to, you know, to have wings in the UK, so you're going to get both factors working together. So I think it's

Speaker 0:
not just income, which I think is very interesting natural income. I think it's a very interesting asset class, but actually your early adopters and I think that's another valuation, a feature, which is going to be very valuable for clients in the longer term and coming back to you here. So it's a real issue that investors need to solve what, from a premier point of view are the kind of key areas that then they need to tackle for for their well, I think if you go back to, I call it the pummelled horse of retirement because I'm picking up from David what they talk about. You know, if you think about how you build

Speaker 0:
what you need to deliver for a client, you kind of have what I call the pummelled horse of retirement income so you'll have your natural money purchase schemes or throwing out some sort of money or your final salary scheme in particular, which is generating that base level of income that your state pension scheme as well. And the next level up talking again, talking to advisor. You know, cash is now perhaps an investment asset class in a way that it hasn't been for the last three or four or 10 years.

Speaker 0:
But the problem with cash, of course as well is cash is yielding What, 3% Maybe 4% these days. But inflation is a lot higher. That so you're actually getting real capital loss on the value of your money in cash. Now, what I found really interesting is of course, now that you've annuity rates, have rep priced,

Speaker 0:
uh, I thought annuity become quite popular with advisers again and with clients. Now what I've noticed, actually, many of the advisers I've spoken to they found the answer to their clients. Are not that keen to buy an annuity? Some of the short term term annuities? Yes, but to physically go and buy annuity, which, of course, you had to do before pension Freedom Day. It was a decision that was taken out of your hands. Today you can make a decision what you want to do. So I thought, actually, with annuity rates coming up again because we had a rep price of deals across the markets, clients would like to buy annuities and just lock in that income forever.

Speaker 0:
But post covid what's happened is the investors have changed their attitude to risk and it's actually quite comforting to be able to touch your money in the bank. It's quite comfortable to be able to change your mind and use the money, and you sell your investments down. If you buy an annuity, you've made a permanent decision for life. You can't get that money back. It's gone. Yes, it gives you an income, but you can't change your mind. And secondly, of course, you can't pass that money on to the next generation. So I'm starting to see Advisor saying, Actually, we don't need to see See annuities

Speaker 0:
as the natural source, and then when you go to the next level above that on the pummelled horse is what you start to invest in next. And so that's where I think natural income comes into play. Uh, and I remember when I started off my career back in in the eighties, you know, multi asset income didn't exist in those days, but Equity income did. It was a very popular asset class for investors to buy, but it's been forgotten about for the last 20 years, as you've heard my learning college talk about. So I think now what I think investing to start thinking about is where can I go and get

Speaker 0:
investment returns that will effectively give me that rising income stream over time. And equity income is a great place to go. And multi asset income is another place where if you got the funders focus on trying to increase that dividend every single year, you tick the box of trying to have that natural income growing through the port through your portfolio, and we're picking up on that point there. So where do investors look where they're looking now?

Speaker 1:
Yeah, well, I think now is time to look at the portfolio and say, OK, well, we know what did well in the last 15 years, but looking for what's going to do well in the next decade, Um, and and you know, all the points that have been made around the table. I think that that equity income is something that, um, you know, that that should form a core part of, uh of of the equity allocation for those who are, um, requiring

Speaker 1:
Come and and that's not just people in in retirement, it can be people who you know who are lucky enough to be you know asset rich. And they want to draw down some of that money to pay school fees or, um, or to, you know, to top up the the income that they that they receive from their job.

Speaker 1:
And I think that, um, the other thing that, um, that has been forgotten is that how important dividends are as a proportion of equity returns. Now, if we look back to the 19 thirties, the average, um, contribution to total return from dividends was 61%

Speaker 1:
and really the last, you know, 15 years last. You know, the decade of of of 2010 to 2020 was the anomaly. You know, 26% of of return came from dividends. And I think that, um, has really imprint imprinted on people's minds. You know, people obviously, uh, the recency bias. You know, there's a There's a sort of, you know, recent performance as a tendency to to inform decisions. And I think we need to look back further in history and say,

Speaker 1:
um, actually, you know, dividends could be a really important part of total returns, um, going forward, and that's what I think investors should be thinking about

Speaker 0:
and and David in terms of dividends in terms of historical lessons. Is there anything else that we can draw on when we're looking at this quite unique period? You know, ultimately, I mean, if you think about constructing a portfolio

Speaker 0:
for a post retiree or anyone who wants to live on that portfolio, whether it's the income or the capital,

Speaker 0:
you know what you do absolutely always know is the income on a portfolio, whether it's fixed income or a mixed asset or an equity income portfolio is much more stable than the capital value. Dividends are much. Although we had that period in 2020 that was an utterly anomalous period where governments intervened. In reality, income over long periods of time is far more stable

Speaker 0:
than than capital values. But right now, if you think about the the market environment that you're faced with right now here and today, making decisions for the next 20 or 30 years, how you're going to invest, it's quite clear inflation is higher.

Speaker 0:
It's quite clear that we're faced with volatility. It's quite clear that the regime post G F. C. Is over, Emma says.

Speaker 0:
And yet you look and you think, Oh, that's all terribly uncertain, terribly unsettled at the moment. As an income investor, I can look at some fabulous companies with huge yields. I can look at the bond market, which you know, obviously was shot to bits. This, you know, back in the autumn,

Speaker 0:
where there's some fabulous yields out of good quality, um, investment grade bonds. You can construct a portfolio today for a retiree where you can lock in a much lower risk strategy with a much higher income that you've been able to do for decades. And so this is a spectacular, timely moment for looking at these kind of strategies. You know, As Gervais said,

Speaker 0:
how how the the UK market has been completely ignored for for decades. And yet it has one of the best dividend streams of any market in the world and one of the most consistent dividend streams of any market in the world. As a guy meeting retirement

Speaker 0:
in this era, you, you know, you may think, Oh, isn't it difficult? Hasn't the market been volatile? This is an absolutely spectacular good time to be locking in a portfolio for your retirement, and I guess rising income and keeping in line with that is really the most important thing at the moment. Yes, I mean to build on EMA's point. You know, if you look at total returns on on equities, there's only two things which matter over the long term, the initial yield

Speaker 0:
and how much it changes. The growth of that income and the advantages of quoted companies is that you get income, which grows faster at periods of inflation because, of course, their sales go up with inflation and so they can generate more income at those times. And so they match the risk of inflation with the income coming from your portfolio and most particularly because some of these valuations are very low and the yields are high at the moment, you can get in at an attractive yield

Speaker 0:
and going forward. We believe, uh, that you can generate, uh through stock selection and portfolios, which actually can grow their dividend yields over time. And that means coming back to the points we've raised the capital value along the way, made zig and zag. It doesn't matter so much, it's that income growth which is going forward when you go back to, you know to to to some things like Mr Darcy, Mr Darcy wasn't a millionaire.

Speaker 0:
He was a 50,000 year a man. That's how they used to speak about wealth in those days. And we need to kind of think about that more going forward. So coming back to you, I want to go into a point about wealth being concentrated in the the over fifties and retirement lasting longer. Is there anything else that they can do around this kind of area that would really help them in their retirement?

Speaker 0:
Well, I think it's it it again. It goes back to what have we all been doing? And it goes back to the point that this is the generation that owned the same wealth. They just got older. So we've spent 30 years, as we talked about earlier, 20 years, 30 years, building growth products to allow advisor to generate the accumulating strategies and just grow. And one thing that's also probably worth mentioning in a world where admittedly much of clients portfolios can be wrapped in tax efficient wrappers.

Speaker 0:
A lot of clients also have their assets unwrapped. So again, in a world where you've had capital gains tax allowance of £12,300. It's actually made sense to take that growth and convert it into unit Cashman to give out the income because it's been tax free up to £12,300 per person or obviously £24,600 for a married couple.

Speaker 0:
But that's now dropped to £6000 individual allowance this year, and as of April next year, it's going to drop to 3000. So

Speaker 0:
the taxable benefit of doing unit en catchment again has made sense in the last few years. But it won't make sense going forward. And and I really want to pick up on what Gervais says is because one of the three key things for me is if you're dependent on unit in cash, you are going to be watching your capital values like a hawk because you're going to be really sensitive. The point about sequencing risk

Speaker 0:
If you focus on building a portfolio where the income is going to grow over time, the income hopefully will take care of itself as long as it's managed in the right structure by the right fund managers, et cetera. But if that takes care of itself. You don't need to worry about the capital, and I think that's a great education piece. I talked to many advisers about this trying to wean their clients off about looking online, or I pulled out the old FT. And they say we all look at online now, don't we? Uh, what evaluations are they? That doesn't matter.

Speaker 0:
Feel the wit of the income. That's what you need to live off. And it doesn't matter what the capital value is going to do. So I think it's about it does require a shift, a sea change. And I think that's what I would really urge advice to think about today. Your central investment proposition, which has been built around a set of risk reward categories. Risk rating. 34567 I don't think that applies when you move into retirement, and the other thing I would also talk about is a retirement income smile that people talk about. It is a great way of looking at it. So,

Speaker 0:
you know, I hear the words that, you know, you might retire at 65. You might be fit healthy. You wanna go and do all the things you didn't have time to do when you were working. Cruises go rock climbing, play golf, do all the wonderful things you want to do. So it's called the kind of the go go years where you're gonna be going out there and do lots of things. So you'll need a high level of income from that.

Speaker 0:
Then, of course, the argument goes, Well, then we might get into our seventies. We might slow down a tad. Maybe I won't because I see to have a bundle of energy. But anyway, we might slow down a tad, take a little bit more sedentary life. I need less income. So I'm not going to be doing quite so much. And then, of course, I might get into latter parts of my life where suddenly care costs grows to the roof. I need a much higher level of income

Speaker 0:
now. I've just described something which is very simple. The retirement income smile. People talk about that. That's the average person. No one is average. What happens if you actually suddenly go slower earlier? Or what happens if your health suddenly deteriorates? You're now gonna scrabbling around. You might need a much higher level of income quicker than you thought. But if your capital sequencing risk is now going wrong, suddenly you increase what I call the cash burn rate where you run out of money before you die.

Speaker 0:
So again, I think for advisers, and we've got an FDA thematic review coming along as well. I think if you can build portfolios that let the income generate that that that income requirement that retirees need, then you take the pressure off yourself as an advisor because ultimately the clients just care about the income and you can move away from that dependency on what the capital value is at any one moment in time.

Speaker 0:
Do do you think we could be faced with a situation where there's a sort of hangover from They've built these portfolios for a long time, and now it takes maybe five years or so to really cotton on to what's happening now. But at which point investors and savers have lost five years of their Yeah, and I think it's an interesting point. I think you know, one of the things that we need, and David mentioned this. In fact, em have also the same thing. I think it's incumbent upon us and industry to challenge the incumbent, thinking the conventional thinking of Ha approaches because I understand why we've got to where we are today.

Speaker 0:
But it does require a rethink, and I think you need to start having those debates now. Having those challenges today and then I absolutely agree with David is that it's also up to us as asset managers to think about. How can we work with advisers? How can we help them solve for their clients retirement income needs? You know, we need to move away from an industry where I grew up in where

Speaker 0:
some fund manager will come along to me and says, Look, here's an indi Indonesian Widget Small cap fund. Go and sell it. Today the role of an asset manager is to listen. I have two ears and one mouth for a reason. Talk to advisors. That's what we're doing. How can we help you solve for your needs? But it's actually the educating the advisors that actually what has worked in the central investment proposition is probably not naturally what you would do in your central retirement proposition, so you need to rethink of how that works.

Speaker 0:
And we're looking at really, What works then what are the assets that really can provide a good level of steady income? Is it real assets infrastructure? What do you think?

Speaker 1:
Yes, we're running a UK equity income fund. Um, maybe a little biassed. Um, but but, yeah, I maybe talk about some of the sectors that you know that have delivered really good dividend growth. Uh, recently. So, you know, a number of our industrial companies? Um, so, you know, holding, such as as bundle and relics delivering dividend growth of of over 10% in their their final dividends. Uh, consumer staple companies delivering good, uh, good dividend growth. You know, I guess Unilever is sort of one that,

Speaker 1:
you know, everyone thinks sort of big and boring, and they've had some some cost inflation headwinds. You know, they still managed to deliver 5% dividend growth, and we've had the energy companies come back, um, b p and shell paying much more, um, dividend this year than than than last year. So on the whole, what we see across, you know, across the UK market, um is is, you know, a number of companies delivering, you know, really good dividend growth at a time when there are concerns about the outlook when there is,

Speaker 1:
you know, inflationary pressure. Um, and I think that's testament to, you know, this time not being different. So it is, You know, if we look back through history, as I said, dividends have done a good job of keeping up with inflation over the long term. You know, in any one given year, it might be harder, particularly in the high inflation years. But But when you spread that over an, you know, investment horizon of five years Plus, you know, actually, you know, they have done a good job of delivering real returns for investors. So So good returns after inflation,

Speaker 1:
uh, for investors. And I think that's what what, um, people need to think about. I think the other thing to reflect on is is the UK, which is very unloved at the moment as an equity market relative to to global funds, Um, you know, is a is a fantastic opportunity, you know, this is this is a a massive valuation discount, uh, relative to to the US. Um, you know, one of the biggest I've seen in my career. Um,

Speaker 1:
it's at a time when I think we're heading into a world which will have a bit more volatility. And that could lead to currency volatility as well. So when a client comes to an advisor and says, you know, I need an income and you know what I need a sterling income. You know, I think it is incumbent upon them to think about managing that that risk as well. So So so with UK, um, income, You're you're you're you know, you're you're helping to to minimise that risk. Um, and I

Speaker 1:
and I do believe that that that UK income funds, you know, have have sort of fallen out of love and out of fashion. Um, because that, you know, and that was right for the last period that we've been in. But actually, if you look back in the decades prior to the g f C, it was actually a fantastic asset class that really did deliver for clients. And I think it will do again.

Speaker 0:
And David, your funding, your strategy? What? What are you seeing there? What? What are some of the big players and and what's doing well from an income side of things.

Speaker 0:
You know, I I'm a very simple person, and I I like to think about the investment challenge in a very simple way. If you think you know, we're dealing with

Speaker 0:
mature clients with cash needs, let's think about mature companies that generate cash. It's very simple, really, isn't it? If there are plenty of those, and of course, the UK is dominated for that, you know the world of growth companies is for young people. For older, mature people, what they need is an income that's generated in consistent and repeatable fashion over long periods of time. The UK has a plethora of those. You mentioned things like infrastructure. Of course. That's the very nature of it. You know, you build an asset, it generates an income for a long period of time.

Speaker 0:
I don't see it as a separate asset class. For me, it's just a subset of equities.

Speaker 0:
Property can be income generated, of course. At the moment, it's suffered a lot with rising interest rates and so on and so forth. But in the long run, the characteristics of property are the rental income grows in line with the economy hence grows in line with the overall inflation rate, so it should at some point again become a good asset. Don't dismiss fixed income, you know, Obviously, fixed income

Speaker 0:
on a decade long view is gonna be a loss making asset in real terms if we continue to have high inflation and the starting point is relatively low yields. But there will be periods where, where you know it rallies in that falling market. But it will always be generating the income you bought it at. So if you buy a yield of seven or eight on a on investment grade bond, you're going to get a return of seven or eight. That's, you know, may be appropriate, and most people can't take the aggregate volatility of equity. So they need to look at

Speaker 0:
some diversifying assets, some lower risk assets and cash. But ultimately, your growing income in real terms in Sterling is going to come from a portfolio dominated by mature companies. For those mature clients that picks up what you said when we spoke before. Fixed income is fixed,

Speaker 0:
it is fixed. And if we've got inflation in the long term, of course that is a disadvantage. It's a great diversify, but it's not necessarily the solution. You really need assets which can grow their income. And one of the thing features about the UK market, which is different from most others, isn't so much this. We've got on income bars that is rather special at a time where things are changing, but most particularly, it's got a large number of smaller quota companies, and they're small relative to shell. But in absolute terms, of course, these are companies with thousands of employees, international operations and they just have different risk characteristics. Often they

Speaker 0:
supporting an in a mature sector which is growing irrespective of the global economy and therefore have better opportunities to grow their income at a time, perhaps when others are are more constrained, and in terms of the funds that you run any sort of sectors in between in the small cut space that are doing quite well, Yeah, I mean, obviously people often talk about the mainstream sectors and they talk about, you know, industries which have grown income. But actually the financial sector is often an area which is overlooked. You know that people say well, that's not very capital intensive. There are lots of capital intensive businesses, not just the banks, which obviously

Speaker 0:
I know, but lots of businesses which have large amounts of capital which they need for regulatory reasons or for for for for reasons, for, for, for investing, to their clients where, actually you know where capital costs money, the cost of capital is going up. The evaluation of these businesses, the opportunities opportunities for these businesses is less. There's less competition going forward. The opportunity to generate a premium returns is all the better, not just financials. Of course, there's huge range ranges of sectors, but But what I'm saying is, just take your blinkers off. There's a much greater opportunity set here than people recognise

Speaker 0:
and coming back to you. So a lot of these factors have combined. Would you say it's a very, very unique period? This and again, we've kind of touched on a few points, but how can they really position themselves in this period? It's It's a really good point, you know, I have to think back to a period basically back at the beginning of my career, when you look

Speaker 0:
look at the optionality that you've got available today, as an investor and and you've heard I said, My three colleagues talk about this income. Investors A day looks to be in an incredibly sweet spot, but everyone's ignored it for the reasons that we know we've gone through regime change in a low interest rate environment and a low inflation enviro environment, Long duration assets have gone well, tax all played out, that it's all been about growth

Speaker 0:
and in a world where there's been little inflation, So I remember thinking about, you know, when I first started off in in the in the in the city so many years ago in this industry, you know, most people built the pensions pot around the base that you retire at 65 you'll be dead by 72. So you didn't have to worry about inflation in your retirement pot. It didn't matter. You probably wouldn't have this longevity risk issue.

Speaker 0:
But today, with mortality rates where they are with, uh, you know, uh, later life care where it is today, there's a very real probability that you will live for at least 20 years or more in retirement.

Speaker 0:
And if you have inflation running at a much higher level than we've had for the last 20 years. The erosive effects of inflation on whatever income you're getting today and on whatever capital you've got today is going to be an incredibly important consideration in a way that it hasn't been a consideration in before. But of course, when I started off, inflation was running at 9 to 10%.

Speaker 0:
So it's almost with and I know Emma, you and I have talked about this as well. It's almost like we've gone back 30 or 40 years. So what were the strategies that worked well in the previous EMBA when you had a high level of interest rates and you had a higher level of inflation and you got a high level of capital volatility in markets? Well, actually, the income strategies were the ones that actually delivered for investors.

Speaker 0:
So I think today this really is an incredibly sweet spot to sort of rethink what you do. And what worked for the last 10 or 15 years is not necessarily what's gonna work for you going forward, and that rethink is really required. We talked about educating advisors again, again in educating investors. They've got to then go back to what worked for them and, yeah, interesting time. Absolutely no, it's I think it's a really interesting time. And I think you know, we as an industry

Speaker 0:
need to really help the advisors and really help the investors understand what is going on and what options are available for them. But because it's so, it just requires a rethink. And if you were going to give investors sort of one lesson to take away, sort of one thing to hold on to when they're thinking about natural income and how it works for them, what would it be?

Speaker 1:
I think it's It's for me. It's about timing. It's to think they should think about the long term and not worry too much about the short term because it feels like there's a lot of uncertainty at the moment. People are worried about, you know, potential upcoming recession. Um, we've obviously been through, you know, a very volatile period, and I think people are you know, it's a lot of, um, the criticism I get when I talk about the benefits of investing in the UK, they said. But what's the catalyst? You know, where do how am I going to pick that that low point? And I would say, Don't worry about picking,

Speaker 1:
you know, the exact moment and getting it exactly right, because we are, You know, we are in the trough in terms of valuation. I believe, um, of the UK market relative to the US. And, um and and And therefore, you know, any time you know, in this trough will be a good time to to rethink that allocation, um, to the UK. And And I think when we think about allocating to to income rather than to to selling, um uh, assets

Speaker 1:
to to meet income requirements again. You know, worry about the decades. Not not about the the months. Um, because actually, if you get this right for clients, you will be, you know, really, you know, solving a problem for them. I think our our industry, um, has sometimes lacked an ability to to express its purpose. And and our purpose is exactly that which is to meet clients objectives in the long term, and and for a lot of people, that is income.

Speaker 1:
And so I would urge people to think, you know, what does my client want in the next decade. And And how do I best meet that and worry less about about You know what the client will think if they're, you know, a few months out here or there.

Speaker 0:
David, Do you think there's a case of over complicating its life

Speaker 0:
when it comes to building portfolios? If people want income, just give them income. I absolutely agree. I I think in in a sense, it's a it's a It's a factor of history. You know that people in accumulation phase the regulator drove people towards risk profiling and so on and so forth. But the reality is we've got clients and huge numbers of them. What they need is an income in retirement,

Speaker 0:
and they have a portfolio.

Speaker 0:
Let's just give them an income. Let's just give them the income. Let's construct portfolios that generate a certain level of income, that that's what we should be doing as as fund managers. And that's how IFA should communicate with their clients. You have this amount of assets

Speaker 0:
with this portfolio construction. We can generate this level of income and we're confident it will grow over time. Problem solved. Why give them a growth portfolio? It may go up and down. You, You you ask you you're having conversations around the wrong subject

Speaker 0:
and and Gervais, when they're looking at the funds and the kind of strategies that are going to give them that income, what should they look out for?

Speaker 0:
Well, most particularly, I think it's actually they need to start this conversation straight away. This is something which can't wait. It's not just for people who are in retirement already, people moving up to retirement. And most particularly, I think it's going to change the way that IFA s engage with their clients at the moment. You send them out annual returns and they've done this and all the rest of it, and it's all to do with capital. We actually need to talk actually about the income, the income you've created this year, the income you creating in the future is how it's changing. I think this is a moment where

Speaker 0:
things people really need to sit up, and I think the other feature, which actually is something which we don't talk about very often is as a financial sector, we should be, you know, socially useful. This is putting into investment to companies, which generate employment, particularly skilled employment. Many of the local companies, if you invest in the UK, are generating extra tax take for the government, which is really essential at this point. And on top of that, if they invest well, of course you get productivity improvement. And the reason why that's so important is that generates

Speaker 0:
income growth, which is beyond inflation on a sustainable basis. I think we're looking at so many different factors, which all come to the same finishing post, which is many of these different types of income generating assets in a portfolio really meet the client's needs in a way which perhaps is completely different from where we've been. And that's why I think this agenda with clients needs to be very much focused, not just in in capital value and how it's changed last week, but actually about the income they're generating

Speaker 0:
and how it's changing. So setting out how much income they'll need year on year and then building that sort of diversified income portfolio to then help them meet that that's right and obviously there there will be a main main opportunity to invest in the mainstream companies, and many people will select, perhaps index, for our products which obviously have a place in portfolios. But of course, if we are in a period of volatility, if there are gonna be a geopolitical events going forward ultimately the job of our manager, yes, to generate good and growing income,

Speaker 0:
but not just to outperform our our our job is to minimise risk. Many of these indices are are full of all sorts of major ratings 5, 10, sometimes more than that in in index positions. So you get a huge risk. The job of a finance manager isn't just to generate an attractive return, but to actually reduce risk, actively reduce risk as well as generate premium return. I think all these features need to be considered together.

Speaker 1:
I can I just add on to that. I think that, you know, if we're looking at investors wanting, uh, an income through retirement, you know, 20 years plus hopefully, um, for people, we need to think about investing in companies that are going to be around for 20 years, plus and able to generate a growing income over that time. And I think that's where as active fund managers we can add value over. You know, the index, which may, you know, may have companies in there

Speaker 1:
which which might not be around, um, in in 10 years time, um, technology disruption or or or just like being in a sunset industry. So So it's you know where you know you can find fund managers who really do have that long term view and invest in companies that that that will be around for for the long term, I think can really solve this issue for clients. I

Speaker 0:
mean, when you go back actually to what

Speaker 0:
been happening with the fans and the excitement and the the returns, which usually generated there was a very similar period in the early in the early seventies called the 50 50 and these companies were also largely technology driven. There was a very narrow band of them. They were all out performed enormously. And when you look back, you actually find actually, like Emma says, they didn't have the longevity that you expected. Polaroid was one of them. Xerox was one of them. You know, many of these companies, they're fine, They're very exciting at the time, but they just didn't have the duration again

Speaker 0:
come back to companies which have got tangible assets, particularly the capital intensive industries, where perhaps if the cost of capital is going up, their their opportunities are actually improving. There's less competition going forward. I think there's so many things changing at the moment. It's a really good time to talk about the natural income agenda and joy. You kicked us off so succinctly. If you could finish off with a couple of sentences for those watching and just see us out for for this master class, OK, so I think you come back to accumulation is what it's been for the last 2030 years.

Speaker 0:
Don't think about the retirement phase as accumulation. I think that's dangerous. You need to think about the retirement phase. Is generating income that will grow over time over time, be sustainable and durable. And the only way to really get yourself into that position is not to rely on unit and cash, but to buy a selection of funds that actually are all set up to not just pay an income today, but who are going to pay a growing income over time and then you solve for the long term retirement needs. Excellent point.

Speaker 0:
Well, thank you very much for watching. I'd like to thank all the panellists David Gervais, Emma and Joy. And then thank you to you. Thanks for watching. See you here next time.