Platforum: Advisers and DFMs call for more income funds

Heather Hopkins Platforum

There seems to be a mismatch between the funds advisers are really interested in – income funds – and the number of those funds available to buy. This apparent tension between supply and demand hides a shifting trend in advisers’ and DFMs’ thinking about decumulation strategies.

At the Platforum Investment Strategy Forum Square Mile client relationships director  Mark James revealed that searches on its website by advisers for funds constituted 42 per cent of searches, while 25 per cent of searches were devoted to capital accumulation and preservation.

About two-thirds of UK-based funds are currently oriented towards capital growth and only about a quarter are income funds. From this data, James wondered whether manufacturers should be changing their propositions to reflect the demand for income, which reflects advisers’ growing preoccupation with decumulation and generating income in retirement.

Our latest survey of advisers indicates the enthusiasm that advisers felt for multi-asset and equity funds at the dawn of pension freedoms has waned in favour of high-yield multi-asset and equity funds. In July 2015, 76 per cent of advisers were likely to recommend an equity fund in light of the pension changes. Fast forward to January 2016 and this percentage has slipped to 46 per cent. In Platforum’s recent adviser survey, 75 per cent said they were likely to recommend high-yield equity funds in light of the pension rule changes, up from 50 per cent in July 2015. We are also seeing a comparable shift in adviser sentiment towards high-yield multi-asset funds.

At the forum, attendees said advisers were increasingly attracted to the concept that clients should typically just draw the natural income from their portfolios. This was despite scepticism about the definition of natural income, the extent to which it was really income and, of course, how natural such income really is.


One DFM conceded that high income funds might be suitable for some investors, but only if they were warned of the serious dangers of buying overvalued assets with not just limited scope for capital appreciation – but also the strong possibility of incurring losses. Dangers lie in the overvalued bond market, especially among corporate bonds.

Despite the superficial attractions of income funds, many DFMs argue for mitigating sequencing risk and pound cost ravaging in decumulation portfolios by advising investors to hold balanced portfolios of mixed assets from which they draw a mix of income and capital into cash or near cash pools for income. Capital and even income returns are lumpy and sporadic and platforms tend to mix them so that clients don’t get hung up on the distinctions between income and capital.

In one IFA’s view, there is a generational difference in approach to the traditional capital and income divide. Older investors in their 80s and above tend to be keen on preserving capital and just spending income. Younger investors tend to be more pragmatic about drawing total returns.

It is increasingly clear from events like this and research Platforum is conducting that arguments are occurring all over the nation about strategies for pension drawdown and generating spendable cashflow to fin-ance people’s retirement expenditure.

Income portfolios vs total return portfolios, how to manage the glide path into retirement, and the number of months’ or years’ expenditure that clients should keep in their cash/low risk pots are all up for discussion. The debate looks set to run and run.

Heather Hopkins is research director at Platforum.