DIY Investor Magazine - page 32

DIY Investor Magazine
|
June 2017
32
FINDING INCOME THAT’S NOT SCARY AND UGLY
Lawrie Chandler
Director, Good Company Wealth
The UK, like most developed nations, saw its birth rate
peak in the mid 1960’s, so in the next decade we will
see a surge of people reaching the state retirement age.
From a personal finance perspective, they’ll also be
shifting priorities from wealth accumulation to income
generation. This phenomenon could be called ‘peak
income’. Though with anaemic cash rates and gilts
under water compared to inflation where can someone
earn a decent income without being terrified when they
see all the risks?
TRADITIONAL SOLUTIONS ARE UNDER WATER
WHILST DEMAND WILL ONLY GROW
In May, the 15 year gilt was at 1.5% and inflation was
reported at 2.6%. The real value of your hard earned
money invested in the safest income asset in the land is
being eroded.
This is before income tax is applied. For some a higher
capital value of their gilt offsets a low yield but for
most in an age of needing an income they want their
investments to pay an income and have a constant
capital value.
Equities come with a decent 3% dividend yield but at
the same time a 12% volatility price. Can an income
investor accept such capital highs and potential lows in
the silver haired years of their life?
THE GROWTH OF ALTERNATIVE INCOME
Many people have taken to the convenience of
collective investment schemes as their product of
choice for income, given the instant diversification and
easy availability. Unfortunately, the FCA Interim Asset
Management report showed that 51% of people in their
investor survey did not realise they were paying fund
charges.
The additional fees of a fund manager, unknown cash
flows and capital value movements have seen new
products emerge in the past decade.
Mini-bonds, peer to peer lending and the LSEs Retail
Bond market are direct offerings that allow income cash
flows to be clearer at the time of purchase and capital
returned at a date in the future.
HOW SCARY AND UGLY ARE NEW INCOME
SOLUTIONS?
Here we give a brief snapshot of some of the less know
facts of mini-bonds, peer to peer lending and Retail
Bonds.
One of the major points with all of these securities are
they relate to financing private individuals and/or small/
medium enterprises which do not have the security and
comfort of big businesses.
This straight away focuses attention on a more
concentrated risk of the individual or specific enterprise.
Retail bonds have been successful, albeit from a very
small base, with issuance doubling over four years, but
many of the credits available in this market are linked to
financial service firms, which have a very specific and
concentrated risk profile as a sub-class.
The spread on retail bonds and volumes traded show
this is still a junior market in development.
Mini-bonds have been a successful vehicle for
borrowing especially where retail investors can see
their return is linked to a tangible asset or government
backed initiative.
These assumptions have proven short coming as many
of the operating businesses that have borrowed in this
way have struggled or increasingly failed.
A useful measure to consider when doing peer to peer
lending is the risk-adjusted income.
THERE IS A NATIONAL APPETITE FOR INCOME WHICH
NEEDS MORE SOLUTIONS’
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