"While markets may eventually recover, investors withdrawing income may never regain lost wealth. A large fall in equity markets early in an investor’s retirement can meaningfully affect his or her long-term wealth.
"Equities represent the largest risk of portfolio drawdowns and are therefore the source of the greatest risk to the long-term wealth of income investors.”
Sue Noffke, a long-serving UK equity income fund manager at Schroders, takes the view that the end of quantitative easing has distorted asset markets, including equity markets, and it could, as a result, be a turbulent time in equity markets. However the same dynamics would also apply to fixed income assets.
Future prospects
Simon Murphy, who runs the Real Income fund at Tyndall, says: “We believe we are in a period where we will see higher inflation than we have been used to over the past 20 years or more.
"We do not expect to stay at the current very elevated levels for long, but more likely settle back towards a 3 per cent to 4 per cent type level, which will still feel very different to the 1 per cent to 2 per cent environment of our recent past."
Murphy adds: "While interest rates will rise further in the near term, it is likely that they remain below the level of inflation for some time to come and so ‘financial repression’ is definitely something to be very mindful of.
"It has been such a long time since we have operated in a sustained inflationary environment, and corporate dynamics, use of technology etc have changed so much in the intervening period that we do not think you can make generalised comments about the sectors and stocks that are likely to do relatively well in the foreseeable future."
Coombs says the problem faced by investors is that many of the stocks that offer the highest yield are also often stocks that “have no growth, and so one is basically turning capital into income, and that’s fine in a world of lower inflation, but not when inflation rises and persists. Also, given longer lifespans, investors may need to have more growth in portfolios”.
Darius McDermott, who advises the VT Chelsea range of multi-manager funds, says that “in simple terms, if people are going to live longer then they need more growth in portfolios, and equities are there to provide growth. Fixed income is not traditionally owned as a growth asset, while equities are.
"While equities are more volatile, the time horizon is also longer in retirement."
