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M&G’s Andrew: Investors need to look through headlines if they want sustainable income

26 September 2017

FE Alpha Manager Steven Andrew outlines why income will be more important than ever over the next decade and how investors can sift through the noise to focus on long-term factors.

By Jonathan Jones,

Reporter, FE Trustnet

Investors looking for income in retirement should avoid focusing on too much information and focus on stable, reliable yields, according to M&G Investments’ Steven Andrew

While the low rate environment may or may not end, investors will continue to seek out higher yielding assets as the search for income becomes more relevant than ever before, the manager warned.

“It has been some time now that we have all had in our heads that society is ageing: that brings with it certain obligations to fund retirement and we have had legislative changes that point us in that direction as well,” he said.

But the scale of the situation is something that investors may not be aware of – 2011 marked the first year of the baby boomers turning 65 and therefore becoming eligible for retirement.

“Given the pattern of demography in the UK since then we are going to see an annual increase in those 65-year-olds right through to 2029 before it peaks,” Andrew (pictured) noted.

“This is an issue that is with us for some considerable period of time and even longer than most of us will be carrying on working for.

“It is something that will not always be front and centre as it will ebb and flow in terms of the news that dominates the financial market – it will sometimes draw attention and sometimes take a backseat – but it will always be there.”

What investors coming into their retirement need most is choice, the manager noted, with the most flexible approaches offering both capital appreciation and income gains.

While many will rely on income to protect them from rising prices, capital gains are also important for the unexpected events that may occur.

Andrew said: “So we can’t split the two. Multi-asset income propositions are trying to offer that solution to look after both of these things because they are integral to each other.

“The wellbeing of your capital on an ongoing basis will determine your income experience over time so delivering a sustainable income on a multi-decade basis is what we’re trying to do.”



Andrew runs the £748m M&G Episode Income fund alongside deputy manager Maria Municchi and aims to generate a growing level of income over any three-year period.

The fund also aims to provide capital growth of 2-4 per cent over any three-year period and has made top quartile returns over one-, three- and five-year time frames.

Since its launch at the end of 2010, set up to coincide with the beginning of the baby boomers retiring, the fund has returned 70 per cent to investors on a total return basis, 26.46 percentage points ahead of the IA Mixed Investment 20-60% Shares sector.

Performance of fund vs sector since launch

 

Source: FE Analytics

Over this period, investors of the income share class would have received £2,815 in income payments from an initial £10,000 investment.

The FE Alpha Manager said he has been able to make both capital and income returns by focusing on fundamentals and taking advantage of mispricing in the market.

He noted that investors can be caught up with the idea of fishing for news stories and new information to give them a short-term edge that are ultimately futile over the longer term.

“There’s no shortage of noise going on the entire time. It is deafening and it is always deafening and there is always a threat – there is always something that we can fear, look out for or wait to be resolved,” Andrew said.

“We have an innate hunger for information and there is good reason for that because our brains reward us with dopamine when we get novel information which makes us feel good and so we want to do it again.

“So, we seek out novel information to constantly update us but it is dangerous because we don’t know what is more important and we end up being led by the media, investment banks, fund managers, and the clamour makes it difficult to find any clarity.”



What investors should be trying to do is focus on what the pertinent facts are, he said, but with so much noise this can be difficult to pinpoint.

An example of this is Brexit, where negotiations are ongoing between the UK government and members of the EU over the terms of the country’s exit from the bloc. Had investors forecast the outcome of the EU referendum in June last year, it would have been fair to expect UK equities to fall.

Yet, since the Brexit vote, the FTSE All Share has risen by 20.54 per cent, defying many expectations as investors have focused on improving economic data and rising inflation, as well as the accommodative monetary policies of the Bank of England.

Performance of index since EU referendum

 

Source: FE Analytics

“When we think about Brexit, what does it really mean? What are the facts that we ultimately as investors need to know?” Andrew said.

“There is only one question that we need to know the answer to and that is what does the future trade agreement look like?”

The problem for investors, however, is that with negotiations going on behind closed doors it is very difficult to know what the true outcome will be, according to Andrew.

“We’ve got two choices. We can either try and outthink everybody else and follow the ebb and flow of the key cast of characters and we can develop our own view of where things are going,” the manager noted.

“That is fine but that supposes that negotiations proceed in a linear fashion and it doesn’t work that way. There’s a long time of not knowing anything really and then stuff happens.”

“We either try to argue that we know best where this outcome is going to be which I would say is a very bold statement or we look for signs where the market is doing this.”

If investors can identify when the market is priced for a particular type of outcome – for example if it is particularly optimistic or pessimistic on the outcome of Brexit – they can identify opportunities in that, said the manager.

Indeed, he highlighted government bonds, which may be currently overpriced partly because people are pessimistic on Brexit.

As such, he said, investors buying gilts are making the conscious choice that the market is going to get more pessimistic on the outcome of Brexit before the end of the negotiations.

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