Blackfinch Group

Investment specialists working towards a more sustainable future

Blackfinch Group
Blackfinch Group

CUTS TO INVESTMENT INCOME

Beyond the steep falls in equity prices earlier this year as the coronavirus situation developed, investors have had to deal with large cuts to the income they receive from their portfolios. As a result, the search for income has become much harder.

Dividends have been suspended, the property sector is under pressure, and now state-owned savings bank National Savings & Investments (NS&I) has slashed interest rates for savers. The result is an overall reduction in the income on offer at a point when interest rates are already close to all-time lows.

CUTS TO INTEREST RATES PENDING

At the lower end of the risk spectrum, a report last week from NS&I, offering premium bonds and other savings products, revealed interest rates will be cut dramatically in November. It announced that, from 24 November, its income bonds will drop from an annual interest rate of 1.15% to just 0.01%.

Furthermore, the odds of receiving a ‘prize’ from premium bonds will lengthen from 24,500-1 to 34,500-1. Further similar cuts to the Direct Saver and Direct ISA are planned. Savers no longer have NS&I to turn to when looking for a low risk investment with reasonable interest rates.

REDUCED DIVIDEND PAYMENTS FROM EQUITY INVESTMENTS

As a solution to a decade-long period of ultra-low interest rates, equities, typically a higher risk investment, have offered reasonable dividend yields. However, dividend yields have also suffered due to the pandemic. Half of the FTSE 100 companies have either cut or suspended dividend payments.

An example is the ever-dependable Royal Dutch Shell, which finally cut its dividend by two-thirds, the first drop in dividend payments since World War II. The situation was compounded further when the Prudential Regulation Authority ordered banks to cancel remaining dividend payments for 2019, and to not pay any for this year. In 2019, banks paid 17% of the FTSE 100 dividends.

CHALLENGES FOR THE TRADITIONAL PROPERTY SECTOR

The traditional property sector has perhaps suffered more than most other asset classes during the pandemic. With the new ‘work from home’ culture and the closing down of businesses, rent cuts and demands for better terms on lease renewals have created headwinds for income generation.

This area of property had experienced challenges even before the pandemic, with issues surrounding gating of funds and troubles on the high street. There will be opportunities in this asset class, although generating income in the short term is not without considerable risk.

ACCESSING INCOME FROM BONDS AND EQUITIES

Despite all this, there are areas where investors can find income. Global investment grade corporate bonds offer a degree of security for investors. Further diversification from global high yield bonds can also boost income. Central banks have offered support to issuers in Europe, the UK and the US during this crisis, averting any form of a credit crunch.

There are also opportunities in equities, with certain sectors thriving in a work-from-home environment. Selective equity investments with reasonable dividends can support portfolio yields.

GENERATING INCOME FROM ALTERNATIVE ASSETS

Beyond the traditional asset classes of fixed income and equities, income generation from alternative assets acts as an additional portfolio diversifier. Areas such as renewable energy offer dependable income streams that can be used within a portfolio to increase yields for investors.

The diverse nature of alternative assets, as part of an asset allocation process, helps to protect portfolio income in times of market stress.

THE ADAPTATION INCOME FUND – SUPPORTING INVESTORS’ AIMS

Blackfinch Asset Management offers the Adaptation Income Fund as a solution to the low-income problem. The fund is globally diversified and risk rated, and designed to deliver a minimum income yield of 3.5% per annum after charges. The fund has only a 10.5% exposure to the UK equity market with zero exposure to traditional property assets such as office space and high street retail.

We also leverage internal expertise within Blackfinch Group, in areas such as renewable energy, to seek out income from non-traditional asset classes. Our work is based on a recognition of the difficulty savers and investors face in today’s low-income environment. Alongside our product offerings, we will also provide further updates for you as the situation develops.

Capital at Risk