INVESTMENT ADVISER | ISSUE 09 2024 37
On the face of it , they are completely right . At the end of August 2024 , the average 12-month yield of monthly paying income funds in the IA 20-60 sector was 4.46 %, where , according to the BoE , the average 1-year fixed term ISA was offering 4.60 %. A better rate , coupled with lower to no risk , could push investors to the assumption that income funds aren ’ t really cut out for a high interest rate world – not unless their yield far exceeds what cash is offering .
Of course , there are scenarios where investing in cash in preference to natural income funds most certainly makes sense , including : clients with no risk appetite , and those with a short-term horizon where the capital invested is needed . There are also those who may be looking to bridge the gap between work and retirement , where their current capital is adequate , but they may just need the interest rate difference to cover them before they go into full drawdown .
Nonetheless , for the majority , is there truly a reason to invest in cash over something like natural income ? If your client ’ s view is still yes , it may be useful to consider whether or not behavioural biases might be playing a part .
ANCHORING AND FRAMING BIAS
It can always be difficult to value the unknown or compare how something has performed ( hence the existence of benchmarks and sectors ). Valuing and comparing returns can be a very sensible course of action . Indeed , this is commonplace in finance : the riskfree rate . This is the ‘ anchor ’, which we use to determine whether the returns are worth the added level of risk . Anchoring bias is when we end up relying too heavily on that number and no longer look at newer information objectively . Framing bias is when a decision is made based on the way the information was given .
How does this relate to investing in either cash or natural income ? As mentioned , there are many situations in which cash would be the better choice for the investor and , equally , there are many reasons why natural income would be the better choice . However , when investors experience both the anchoring and the framing bias simultaneously , the logic breaks down .
It can be very difficult for an adviser to recommend something with a yield lower than the investor ’ s default ‘ anchor ’ rate , that is framed in a way where the yield is the main point of comparison . Throw in a touch of
confirmation bias ( favouring information that confirms your current belief ) and status quo bias ( a preference not to ‘ rock the boat ’ and to stick to inaction ) and suddenly natural income is the lesser choice , no matter the investor ’ s circumstances .
Simply knowing the potential biases can sometimes help an investor in making a rational decision , and the adviser to guide them – and where possible explain how investing for natural income can be advantageous . For example ( and this is explored in more detail below ) the potential for the growth of capital , and diversification .
INCOME , WHATEVER THE WEATHER
Of course , fund managers are also susceptible to behavioural bias . Our process-driven approach to risktargeted investing within the WS Canlife Diversified Monthly Income Fund helps to mitigate this by managing to a specified asset allocation .
We apply a nuanced investment approach , rather than pursuing income at any expense , to try to achieve this balance between income and capital growth . Unlike peers , we aren ’ t wedded to a particular approach such as focusing on high-yield , or stock style , such as value equities . This helps us to avoid becoming concentrated in particular regions or sectors . Instead , we invest in a diversified portfolio of income-generating assets , including global company shares , international government and corporate bonds , as well as REITs and infrastructure investment trusts .
Providing a consistent monthly income stands at the heart of our approach . We aim to deliver this by setting a targeted monthly income payment per unit , in order to maintain a stable pound value for these dividends , even as the capital value moves up and down . This payment is then reviewed annually . We then combine the monthly dividends with quarterly and annual enhancements . This process helps give confidence to the end investor that they will receive a specific monetary amount .
IMPORTANT INFORMATION The value of investments may fall as well as rise and investors may not get back the amount invested .
The fund may invest in property funds that may be illiquid and subject to wide price spreads , both of which can impact the value of the fund . The value of the property is based on the opinion of a valuer and is therefore subjective .
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice , a forecast or a recommendation to buy or sell securities . These views are subject to change at any time without notice .
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited , Canada Life Limited and Canada Life European Real Estate Limited . Canada Life Asset Management Limited ( no . 03846821 ), Canada Life Limited ( no . 00973271 ) and Canada Life European Real Estate Limited ( no . 03846823 ) are all registered in England and the registered office for all three entities is Canada Life Place , Potters Bar , Hertfordshire EN6 5BA . Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority . Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority .