Launched in 2011, the fund is managed by Kevin Murphy and Andrew Evans and invests in a diversified portfolio of UK companies.

Joseph Hill, HL senior investment analyst, said that the fund could diversify an income-focused portfolio or offer value exposure to a more general portfolio.

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“We think Murphy and Evans have the experience and support to deliver good long-term returns to patient investors, although there are no guarantees,” he said. “We also have a positive view of the collegiate approach, capability and experience of the 12-strong value team the managers form a part of.”

Murphy has been at Schroders since 2000, joining as an equity analyst before managing money since 2006. He has run the Schroder Income fund since launch.

Meanwhile, Evans joined the firm in 2015 as a member of the global value team. He became a named manager on the strategy in November 2022.

According to FE Fundinfo, the strategy has returned 33.5% over three years against the IA UK Equity Income sector average of 20.2%.

This article was written for our sister title Portfolio Adviser

While the bounce back in bond income has made owning bonds for their income-generating qualities more desirable, McEntegart said the knock-on effect has also been to free up capital from income-generating ‘bond proxy’ equities into growth-focused companies.

“Being less reliant on equities for income offers a chance to reshape that component of the portfolio by geography, industry and theme,” he said.

“Low average yield from the US equity market is no longer the issue it was,” he added. “Instead, its growth potential is something that can be more readily tapped.”

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For example, McEntegart said it would have been difficult to own companies such as Microsoft, which is developing AI and has a 49% stake in ChatGPT, and Broadcom, a global leader in semiconductors and infrastructure software, when income was scare since they yield less than 1% and 2% respectively.

“Growth themes in other markets are not off limits either,” he added. “Some 7.4% of our portfolio [25% of equities] is now invested in eight businesses benefitting from the technology and AI theme which has been an important growth engine while other parts of the market have faltered.”

Meanwhile McEntegart argued the reset in bond prices has also enabled multi-asset managers to look to bonds for other qualities.

“Adding to bond allocations, particularly investment grade, allows for lower volatility,” he said. “When uncertainty remains significant and asset correlations high, it is surely better to tilt towards the contractual income of bonds and their pull-to-par nature which aids total return.

“Markets wax and wane with the economic cycle, as we have seen in the ten years since the fund’s inception,” he added. “Navigating that in real time is key.”

In the portfolio’s simplest form, the gains – and therefore the risks – come from equities, while the containment – the main source of income – is provided by bonds. The proportions are dependant on the taste of the investor and whether they have an appetite for return or security.

But the inventor of the MPT himself, Nobel-prize-winning economist Harry Markowitz,  acknowledged that this was never intended for running an individual’s portfolio, but to be applied to open-ended, undated, mutual funds with daily cashflows seeking to grow in value.

He said: “The investing institution I had most in mind when developing portfolio theory for my dissertation was the open-end investment company or mutual fund.”

If the inventor himself ignored MPT for his own pension, advisers and income seekers would be wise not to ignore him.

In spite of this, virtually all investment theory directed at the UK retail market continues to be some restatement or rehash of MPT based on analysis commissioned by institutional investors for funds, not people. This is frequently then re-badged by the marketing departments of fund management firms to suit their own ends when soliciting new money.

We argue that MPT has become a less appropriate strategy in recent years, but nowhere is this more apparent than when seeking to generate long-term income. The primary objective here is certainty of income, not capital growth. This need is invariably for income that arrives in investors’ bank accounts with the same regularity as their monthly bills. Most income investors are retirees who need to replace a monthly pay cheque.

However, fund managers usually have different objectives. They may have a remit to provide an income – which allows their fund to be marketed to income seekers – but they have less explicit goals that might not benefit the end investor.

The reality is that competition for assets often makes maintaining and growing capital an equally important objective because it improves a manager’s position in fund league tables. And of course, more assets and higher values mean increased ad valorem fees for managers.

There is clearly some dissonance between what income-seekers need and how the industry goes about meeting that need. The main risk to a fund manager is that their returns fall below the benchmark and peer group – the risk to a retiree is that the expected income is not delivered.

Essentially, MPT reduces volatility by combining assets whose values move differently to each other. This approach can work with a long-term, open-ended pension fund or scheme with continuously variable cashflows, but not for an income investor who’s timescale is finite and expenses have a fixed baseline.

The biggest difference between a pension scheme and a typical income investor is that the former has monthly cashflows coming in from both investors and employers. For the income seeker, every penny of income being paid out has to be generated by their pension or income pot, which is often their sole source of investment income.

An investment consultant can afford to get it wrong when advising a DB scheme because there is no harm done to the scheme retirees when the employer is legally obliged to sign blank cheques to meet any shortfall.

This is not so with individual income investors. Not only do they have their regular monthly income switched off, but they must also be cashflow income investors as well – a task hard enough for most advisers, never mind their end clients.

Doug Brodie is CEO of Chancery Lane

This article was written for our sister title Portfolio Adviser

It is generally considered an investment style but, according to David Jane, manager in Premier Miton’s macro thematic multi-asset team, it can be reframed as an ‘output’.

In a commentary note, Jane explained this approach involves shifting the focus from the assets that are the fund’s inputs to the actual income it outputs.

“Most fund managers running income strategies conceive of income as an investment style, they believe that by favouring higher yielding shares, that may give them an investment edge over time,” he said.

“That has certainly been true for various periods in the past, although in recent years growth has been the dominant style.

“With growth outperforming income for an extended period, even income managers tended towards a greater growth bias, and the Investment Association obliged by reducing the income requirement on the income sectors.”

Jane said that in running the firm’s Cautious Monthly Income fund, the team avoids the typical bias towards higher yielding shares and bonds.

“We certainly do not target a yield for the fund,” he said. “We see income as the output on the fund not an input. The output we are seeking is not yield per se but an income stream that grows in line with inflation over time.

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“This allows us the flexibility to invest in any asset class or region to meet the fund’s overall objective, so long as the income and risk requirements are met,” Jane continued. “We do not even limit ourselves to equities and bonds and are happy to include such assets as commodities, even though they do not pay any income.”

Jane said this way of working is part of a wider aspiration to engage in ‘flexible thinking’ while managing money.

“Over the past decade or so this flexibility has served us well as growth as an investment style has been performing well, while income has lagged.”

He explained that having flexibility to invest in growth sectors and themes has enabled positive capital returns while still generating income. It is difficult to grow an income stream over time if the capital value of the fund is not also growing, he noted.

Turning to the outlook for the near term, Jane said his team believes now that bond yields are at more normal levels and inflation is back to stay, income as a style may again perform well.

“The previous decade or so was highly abnormal, particularly post global financial crisis. Rates were held abnormally low, and inflation was not an issue. This led to an environment where bonds and equities became negatively correlated and yields consistently fell.

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“Portfolio construction in this environment was relatively straightforward: combine growth equities with long duration bonds and all is well, during weak equity environments your bonds might bail you out.”

A different approach is now required though, according to Jane.

Under a ‘more typical regime’, equities and bonds are positively correlated and weak equity markets are more likely to be associated with periods of higher inflation, rather than deflationary recessions. In this environment a different approach may be required to construct an income portfolio, he said.

With bonds no longer a hedge to equity, a better hedge would be inflation beneficiary assets such as oil and commodities, as well as hard asset-based businesses in equity and property.

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Combining these with equity may be a less volatile strategy going forward than the 60/40 equity bond mix.

“History would suggest that if current conditions persist that not only may a growing income be an important demand from clients as inflation bites, but that income strategies may perform well compared to the recently favoured 60/40 and growth biased approaches,” Jane said. “Portfolio constructions may need to adapt, but this could very much favour an unconstrained income style.”

The Schroder ISF Dynamic Income fund is actively managed by Remi Olu-Pitan, head of multi-asset growth and income at Schroders, and Dorian Carrell, head of multi-asset income.

Designed to deliver an “attractive and resilient income stream”, the fund invests in a diversified portfolio of assets worldwide, including equities, fixed income, and alternative investments such as convertible bonds, securitised debt, insurance-linked securities and emerging market debt.

The fund also incorporates environmental and/or social characteristics, within the meaning of Article 8 of the SFDR.

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“What has worked over the past decade may not work in the next decade for investors in search of income and capital growth,” said Peter Harrison, group chief executive of Schroders. “In a world of elevated inflation and interest rates, investors’ capital needs to work harder.”

He added: “Combining Schroders’ extensive investment expertise with HSBC’s strong distribution network, Schroder ISF Dynamic Income provides HSBC Global Private Banking and Wealth clients with a differentiated investment solution that aims to deliver consistent income and long-term capital growth.

“We are pleased to continue our programme of global fund launches, now with an actively managed investment solution which will enable our clients to access a range of asset classes across global markets,” said Lavanya Chari, global head of investments and wealth solutions of HSBC Global Private Banking & Wealth.

She added: “This launch complements our existing strong fund offering to provide an additional option for our clients to put cash to work for their portfolios.”