Where Can Investors Find Income?

Six years after the Bank of England dropped base interest rate to 0.5% a new wave of income seekers are entering the market looking for yield in retirement. Where can they find income?

Emma Wall 15 April, 2015 | 12:21AM
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Emma Wall: Hello and welcome Morningstar. I am Emma Wall and here with me today is Jonathan Willcocks, Global Head of Retail Sales for M&G.

Hello Jonathan.

Jonathan Willcocks: Good morning, Emma.

Wall: So, we're here today to talk about the quest for income. With the realm of our Retirement Week Special, I thought we'd start by going back and to when base rate first got dropped down to the lowest ever rate of 0.5% and what that really did for savers and what that meant for the investment market?

Willcocks: I think it's a very good point because essentially in the last few years, we've seen a complete collapse as you said in deposit rates. So in a world where rates have collapsed, investors then began to move and look at alternative options. So what we saw in about 2009 was investors then decided to go and buy corporate bond funds which offered a high-yield, be investment grade, maybe some high-yield bond funds and they essentially tried to clip the income from those funds to replace the loss of income on deposits. Because when you think about deposits dropping from 3% or 4% to half, it doesn't sound a lot in of itself, but maybe you've dropped your actual level of income by 70% or 80%, is a dramatic drop.

Moving into bond funds at that time which were yielding around 4% or 5% or 6% allowed investment alternative source. But of course those yields have also come down now. So investors again – saves again, now have a different problem is, where do they go for income today.

Wall: And of course, there we were just looking then at people who are investing money for maybe a proportion of their income if they are in retirement, because the rest of it would be made up with annuity income, it had to be made up with annuity income. After April 6, we're now living in the world of pensions freedom.

Willcocks: Yes.

Wall: Meaning that people don't have to purchase an annuity, which means there will be even more people looking to the multi-asset investment market to find income. Where do they go?

Willcocks: This is really good, an interesting conundrum, because we never had a generation of savers with so much money. So the baby boomer generation that was born from 1945 to 1964 is the wealthiest generation this country this country has ever seen. And they have spent the last 20 years trying to accumulate their retirement. They are looking for capital growth. I mean technology stocks did so well in the 1990s. We had good run in the equity market up to 2008. So, everybody is trying to accumulate that pot. Then you have the collapse in deposit rates.

Now that generation, if you roll the clock forward 65 years, they've been starting to retire from 2010 onwards, and they are going to carry on retiring, because the fact the biggest birth rate was in 1964 at the end of the that baby boomer integration. So they are not going to retire until 2029. So for the next 15 years, you've got a generation, the wealthiest generation of savers we've ever seen coming though desperately hunting yield. Nothing to find in deposits today, not much perhaps exciting in the core bond space today, so you are right, absolutely. The investors are now looking towards multi-asset income.

But if you are a saver and you said, it causes lots of optionality, you have annuities still exits and that still offer decent rates not as much historically, but who know those annuities rates may go up in time again. So you shouldn't ignore annuities. I think still a part to play. But as you are thinking about retirement here, you have to think about two things.

How long am I going to live? And will my money still be around before I die? Well I could run out of money. So what you need to think about is, I need to go find income somewhere. Cash may not be right today, but might be in the future. Corporate bonds are less attractive today, but they are still attractive deposits rates, but I don't know how the future is going to pay out. So we're seeing lot of savers and lots of investor coming to us and go, you know what, we don't know what to do. Can you take care of the problem for us. Can you look at something, and that is why multi-assets fund are now becoming very popular.

Wall: Is it the job of a city, because asset managers have these products which could well you know fulfil what investors are looking for as you say, but investors may not know about them, savers may not know about them, especially if you have a small pot and you are perhaps not willing to pay for advice. So, how much responsibility does the city have to take on to make to educate potential inventors out there?

Willcocks: Well I think this is a very interesting point. So, we talk about the multi-asset opportunity for saver, but at the end of the day we've also got to communicate that. When I think the city itself has to get better at communicating, fund managers have to get better at explaining what it is that we offer. What it is that all fund managers offer, in terms of products and not using jargon.

Wall: Jonathan, thank you very much.

Willcocks: It's been a pleasure. Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar