- We stopped offering Income accounts as of February 17th, focusing instead on our Growth offering.
- This is because we’ve seen Income account yields become less competitive relative to our Growth portfolios, thanks in part to rising interest rates.
- We will continue to manage our existing Income accounts, with a view to migrating them to risk-appropriate Growth portfolios soon.
- We have exciting announcements to come later this year, with new and innovative product offerings on top of our market-leading Growth range.
As of February 17th, InvestEngine stopped offering Income accounts to new investors. Here, we’ll set out the rationale behind the decision, as well as what it means for clients currently invested in Income portfolios.
Choosing a portfolio based on its yield can be an appealing strategy. Maximising a portfolio’s yield, however, comes with additional risks which may not always be immediately apparent to investors.
Yields have risen dramatically since we first launched the Income portfolios. Over this time, we’ve seen the Income account yields become less competitive relative to our lower-risk Growth portfolios.
So, we’re choosing to focus on our Growth proposition at this point. We will be continuing to manage existing Income accounts, with a view to gradually migrating clients into risk-appropriate growth portfolios at an appropriate time. We will be communicating with Income clients over the next few months to provide further clarity and provide them with further options.
Although we are no longer offering Income accounts, we have many exciting plans to be announced later this year. Our resources are currently focused on ensuring our Growth range remains market-leading, as well as continuing to develop new and innovative product offerings – more details of which will be released in the coming months.
Why we’re moving away from Income now
Optimising a portfolio to maximise its yield (aka “reaching for yield”) tends to come with the trade-off of increased volatility. Part of that trade-off is owning higher risk bonds of lower credit quality, meaning the bonds are issued by less financially stable companies or countries.
In addition, these lower credit-quality bonds traditionally perform poorly in times of market stress – exactly when investors will be looking to bonds for protection. They are also less liquid than higher grade bonds, with this also taking a hit during market corrections.
Further, our Income 2 & 3 portfolios also contain allocations to equities in order to increase their yields. While this successfully increases the yields to desired levels, it also introduces risk. Only buying equities with the highest yields means equity allocations will be skewed towards very specific types of stocks and sectors.
For example, the high-yielding FTSE 100 index has significant overweights to the energy and financial sectors. By buying a FTSE 100 tracker for its yield, investors are sacrificing diversification by introducing relatively large allocations to a small number of high-yielding sectors.
Because income is often equated with safety amongst newer investors, there is scope for confusion and misaligned expectations given the higher risks associated with high-yield portfolios.
While yield can be a useful approximation for expected returns for high quality bonds, when it comes to higher risk investments, including lower quality corporate bonds and particularly equities, a security’s yield has a much lower correlation with its expected return. Academic studies have shown that investors rarely receive the advertised yield on corporate bond funds, due to issuer defaults, downgrades, and bonds being called by their issuers. Within equities, the relationship is even weaker due to the non-contractual nature of dividends.
The difference between yield and return presents a further opportunity for confusion, particularly among more novice investors, who are more likely to equate the two. While this issue can be solved with ongoing education, our fiduciary duty is always to ensure clients remain in the portfolio which maximises risk-adjusted returns given their risk profile.
Our approach to portfolio construction within our Growth portfolios involves maximising risk-adjusted returns on a total return basis – i.e. aiming to maximise returns from both capital and income. While the performance of the Income portfolios has been strong, we believe a total return approach will offer clients a superior experience compared to a portfolio optimised purely on yield.