Brian’s Brainstorm

The Obsession With Yield

It is nearly 10 years since the financial crisis heralded an era of ultra-low interest rates, while quantitative easing served to crush bond yields to implausibly low levels.  Yet there are still investors out there that crave a natural yield from their investments. They believe that it is only prudent to spend the income from your investments and to eat into your capital to fund current spending is somehow sacrilege. But in the era of rock bottom interest rates, the search for high yield can often suck the individual into some unwise investments.

The modern investment approach is to invest without taking on unnecessary risks but withdraw from the fund a combination of income in the form of dividends and interest but also taking advantage of some capital gains.  This is known as the total return approach and it has three main advantages.

First the natural yield approach, by focusing entirely on income, misses out on really good investment opportunities.  There are loads of good companies who generate high profits who choose not to pay dividends to shareholders.  Instead they decide to plough profits back into the business where it already earns a high rate of return. These excellent companies would not be on the radar of a natural yield investor.

Second the total return approach is more flexible.  Instead of your income being dictated by the vagaries of the current yields on financial instruments, you can take money out when you need it through crystallising some capital gains to supplement any shortfall in income to fund current spending.  Indeed provided you leave enough of your capital gains invested to allow your capital to keep pace with inflation, you are not behaving imprudently, provided, of course, savings are adequate in the first place.

Third if you look at investments outside tax wrappers; it is invariably more tax efficient to have your returns in the form of capital gains rather than income.

So the obsession with natural income is indeed an outdated approach to managing your financial affairs.

Brian Durrant

Staff Matters

  • On the 22nd March, members of the Conçerva team took part in a Charity Quiz Event organised by Seven Investment Management.
  • In a crowded field the team achieved a credible 4th place overall.
  • Great fun was had by all and the money we helped to raise will go to Francis House Children’s Hospice in Manchester and will surely be put to great use.

Statistical Information

Last Month This Month Change
CPI 2.7% 2.5% -0.2%
RPI 3.6% 3.3% -0.3%

The latest Consumer Prices Index (CPI) figures released by the Office for National Statistics (ONS) show this inflation measure has now reached its lowest level since March 2017.

This recent fall surprised both analysts, many of whom had predicted that inflation would remain the same, and the Bank of England, which had forecast a rate rise to 2.8%. The decline was mostly caused by a fall in the rate of goods inflation which is significantly affected by changes in the exchange rate.

This fall suggests that the effects of a weak pound, which stemmed from the Brexit referendum results, are no longer driving significant price increases for imports into the UK.

UK Consumer Price Inflation

Feb 2018 Mar 2018 Change
Base Rate 0.50% 0.50% +0.00%

The Monetary Policy Committee (MPC) voted 7-2 in favour of maintaining an unchanged Base Rate of 0.50%.

MPC Meeting – Summary and Minutes

The MPC is next due to meet on 10th May.

Statistical Information

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