Advisers should avoid committing to a specific yield target as they negotiate the "unprecedented challenge" of the current low-return environment, argues Legal & General Investment Management (LGIM) multi-asset fund manager Andrzej Pioch in this video interview.
Asked by Professional Adviser editor Julian Marr in the above video for his thoughts on the ongoing demand for income-generating assets, Pioch (pictured) says investors' search for yield is unsurprising considering the continuous lowering of interest rates by central banks.
Pointing to the major central banks' commitment to quantitative easing for the best part of a decade, he continues: "In this environment, advisers are facing an unprecedented challenge - basically, how to provide a stable, sustainable but attractive yield to their income-oriented clients without exposing them to excessive risk."
While delivering yield is clearly important in such an environment, Pioch warns advisers and their clients against the temptation to set specific yield targets. "The moment you structure a portfolio in such a concentrated way and commit yourself to a specific yield target, you have to accept the risk that proposition will vary over time," he explains.
"The choice for investors and their advisers, therefore, is either to target yield and accept varying risk or else to use a risk-targeted solution and accept varying income."
According to Pioch, the LGIM multi-asset team aims for stable levels of risk to ensure ongoing suitability for investors as they know from their conversations with advisers that this is a primary concern.
"We will still tilt the asset allocation to higher-yielding asset classes and in such a way that we can provide an attractive yield to income investors," he adds, however.
Focusing on the "natural income" of asset classes, Pioch goes on to argue, can act as a buffer throughout market bull and bear cycles.
Recognising many clients are looking for stability of income as much as a good level, he explains that having a view on what an asset's natural income is likely to be over a year allows a fund manager to split this into equal monthly payment, with any additional return then distributed at the end of the year.
Pioch adds: "This approach means we can bridge the gap between the kind of fixed withdrawal many clients are used to and a natural income strategy that will lower a portfolio's sensitivity to the risk of pound-cost ravaging."
To watch the first interview in this series, 'Weathering the investment storm' through multi-asset, please click here.
To watch the second interview in this series, The ‘four pillars' of multi-asset investing, please click here.
To watch the third interview in this series, ‘Don't index in multi-asset just for the sake of it', please click here.
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