A new strategy for fixed income

Advisers seeking to provide a reliable income stream for clients have always grappled with a number of uncomfortable compromises and with Chinese market volatility this bind has tightened.

While advisers are seeking cash to facilitate their clients' lifestyle, finding the right fixed-income investment that can sustain both the income while still preserving capital has presented only limited options.

Of course, the banking system is an option but, while secure and predictable, it does not necessarily return enough income to satisfy clients' cash needs or protect them from continued interest rate falls. Further, by nature, a term deposit is illiquid and there is no prospect of responding to market opportunity.

Most advisers would agree that bonds are a more attractive option at the high end of the capital structure likely to preserve capital and return enough cash to investors to sustain their retirement lifestyle. Further, the investment is partitioned outside of the banking system to encourage better investment discipline. However, while advantaged over term deposits, bonds have, until recently, presented their own set of challenges.

To enjoy the professional investment management of fixed-income investments, advisers have been forced to horse-trade the client's interests by forgoing the benefit of direct ownership and underlying investment control for the sake of surrendering to the fairly opaque strategy of a managed fund. Of course, once invested in a managed fund, the distribution of income is far less predictable and beneficial ownership of the bonds is lost.

In examining the real–life needs of advised clients there was clearly an appetite for us to provide a fixed-income solution that was focused on preserving client capital, the generation of regular and predictable income, expert management, transparency and, critically, direct ownership.

There was, however, one other feature that seemed to ring true with the market: the ability to control and synchronise the regular payments of income to the needs of each client.

Understanding the holistic nature of financial advice, here was an opportunity for an adviser to sit with the client and demonstrate how their retirement lifestyle would unfold, with predictable income and significantly more dignity than equity markets allow. It is this that resonates for the client – to be able to gain exposure to market opportunity without being subject to the potentially devastating volatility that market instability creates.

The press around China's rollercoaster equity market, coupled with the US Federal Reserve's recent raising of interest rates after nearly a decade on hold, has produced a strong signal that the bond market is a credible antidote to investor anxiety and now better options are available since the last time they looked.

Without question, 2016 will hold more than its fair share of change for the market and advisers will be challenged by their clients for ways to both secure their wealth and provide attractive returns.

Certainly, it is these kind of market conditions that test the most independent investors, who typically only seek financial advice under pressure. It is these discussions, where we see customised portfolio strategies exerting great value, to provide investors with investment access, portfolio structure and a service dimension, that cannot be achieved alone. Moreover, these are the clients who advisers won't be hearing from for 'please explain' meetings following episodes of volatility.

Grant McCorquodale is the head of private clients and intermediaries with FIIG Securities