Income increases

Investment product providers who are trying to persuade advisers and investors to sample their wares understandably point to their performance track records; analysts and the media also tend to focus on the data. But while investors are, of course, concerned about the returns they earn on their money, performance is rarely the whole story. Many people are investing for a specific purpose and want to make it as easy as possible to achieve their goals.

The investment company industry recognised this early on. It pioneered the use of savings schemes, for example, enabling people to drip feed cash into their investments on a monthly basis. It was quick to offer pension and individual savings account wrappers alongside its funds (and personal equity plans in the days before Isas). It launched savings products targeted at parents and grandparents putting money by for children.

The latest examples of this needs-based approach to investment are to be found in the way that closed-ended funds are supporting investors looking for income. In a period of ultra-low interest rates that has now endured for well over a decade, the investment company industry has recognised that more people than ever before are turning to equity-based collective funds to generate income.

Those numbers have been swelled by the pension freedom reforms, which have led to a growing number of retired savers maintaining pension funds from which they draw an income directly.

Investment companies have responded accordingly. One simple step has been to make it more convenient for investors drawing an income from their funds. Some 50 per cent of investment companies now pay their dividends on a quarterly basis, rather than every six months, making life easier for those dependent on income to manage the flow of payments. A handful of funds even offer monthly dividends (and more are likely to follow).

Elsewhere, increasing numbers of funds are taking advantage of investment companies’ right to seek shareholder permission to make income distributions from capital. This has a downside, of course, in that there is then less capital left over for growth. But this may not matter to income seekers more focused on yield.

One positive effect of the move to paying income from capital has been that investment companies offering exposure to asset classes that aren’t normally associated with dividend pay-outs – private equity, for example – can still offer decent yields. The choice for income-focused investors has therefore been expanded.

Closed-ended funds have also sought to extend choice in another way, with new funds targeting asset classes not previously available to retail investors – everything from infrastructure to aircraft leasing plans. Again, the result has been to give yield seekers more options as they ponder how to generate an income stream.

The bottom line here is that if you’re in the retail investment business, it’s crucial to think about why your customers are investing. The asset management industry expends a lot of energy talking about performance, weighing up alpha and beta, debating active versus passive management, and navel-gazing over the relative records of individual managers. Rightly so – returns matter and they’re what investors are paying for. But it’s crucial not to lose sight of the end goals of your investor base, which are almost always focused around a particular need rather than the desire to earn a higher percentage return. Making life easier for the customer is important too.