According to Mr McIntosh-Whyte: "This clearly presents a challenge when targeting income for our Strategic Income strategy. We therefore seek out high-coupon government and investment grade bonds ,between 5 per cent and 8 per cent in some cases, for our fixed income allocation. These bonds are bought above par so we anticipate an erosion to the capital values due to the pull to redemption.
"This capital erosion is offset by the superior capital growth targeted from the equity investments. In a world of rising interest rates we think the businesses we hold – those with growing free-cash flow, low debt levels and pricing power – will be very much in demand and significantly outperform higher yielding equities with little or no growth.”
Avoid temptation
The low yield environment over the past decade has made it much harder for income-seeking investors, according to Martin Bamford, chartered financial planner and managing director for Surrey-based Informed Choice.
But he insists that although there is a great temptation to go off seeking higher yields overseas and in alternative asset classes, for the vast majority of retail investors, the right approach is to accept the lower yields on offer and tolerate some erosion of capital until things return to more normal levels.
He explains: "We have continued to recommend a diverse portfolio of mainstream investment assets, with a focus on UK equity income, corporate bonds and some commercial property. These assets can still comfortably yield around 3 per cent net of charges, which is more attractive than a bank account and offers some potential for capital growth too."
Mr Bamford says another approach to consider is to invest for capital growth and then withdraw capital as income. This approach can be preferably from a tax planning perspective too, making use of the annual capital gains tax exemption on unwrapped assets.
He comments: “It gives investors, particularly older investors who are supplementing their income in retirement, more stability of income each month or year, accepting that the total value of the portfolio might fluctuate.”
In terms of targeting a sustainable level of capital withdrawals, this varies depending on the time horizon of the investor and the amount of risk they would like to take.
Mr Bamford adds: "In our experience a target withdrawal of 3.5 per cent or 4 per cent is typically sustainable over the longer term.
"As with all things financial, investors should review their income or capital withdrawals at least once a year to ensure these remain sustainable."
Aamina Zafar is a freelance financial journalist
