Scopic Research interview

The value of an investment in the Fund, and any income from it, can fall as well as rise. Capital at risk. Past performance is not a guide to future returns.

Paul Ilott (PE): I'm Paul Ilott from Scopic Research. We've been researching multi-asset funds on behalf of advisors since 2009. More recently, we've been turning our attention to the FCA's thematic review of retirement income, which has caused many advisors to reappraise the types of retirement strategy they're recommending to their clients. So, with this in mind, we're going to look at the types of risk that advisors need to take into consideration when taking clients down the capital withdrawal route. 

This is where clients withdraw a regular stream of capital from their invested pension pots, in order to sustain their income needs throughout retirement. We'll then be looking at a retirement income strategy that I believe has been unfairly overlooked, and that is withdrawing a natural stream of income from a multi-asset income fund. And more specifically, within that broader category, those funds that deliver a predictable level of income throughout the year and then aim to grow that year on year. Then, finally, we're going to look at the practical implications of bringing this all together within an advisor's business. 

And I'm happy to say that, in order to take us through all of this, I'm joined by Steven Hay, who's Head of Income Research at Baillie Gifford, where he and his colleagues manage the Baillie Gifford Monthly Income Fund, which fits very neatly into the cohort of funds that I've just described. So, very good to see you, Steven.

Steven Hay (SH): Hi, Paul.

PE: Can you please start by looking at the risks that advisors need to consider when taking clients down the capital withdrawal route?

SH: Absolutely. I mean, I think the biggest risk here for me is sequencing risk. And it's really not talked about enough, and it's really about the timing of your investment returns. And I think, an example is always a great way to really illustrate this point and hopefully there's a slide coming up on the screen now which is going to illustrate this point. So we've got two identical retirees with pension pots that are invested identically in 60-40 equity bond funds with a 5 per cent withdrawal every year.

Now, the only difference is one retiree is retiring at the beginning of 1974 and one retiring at the beginning of 1975, otherwise identical. Now, you can see from this chart what a difference the timing of the returns makes. Basically, investment returns in 1974 were pretty bad on both the equity and the bond side. And withdrawing the money, taking money out of capital at that point, really dramatically affects the future returns that you see. So, the pensioner retired in 1974 ends up running out of money after 25 years, whereas the pensioner that retired in 1975 has a multiple of their money in terms of the size of their pension pot. So, really a dramatic difference.

So, this is something that people need to be aware of, and it's not talked about enough. And I think it's one reason why, as you mentioned earlier, looking at taking a natural income out of a series of assets is a really attractive idea and avoids you having to sell down capital at a time when the market is really low.

PE: Yes, and I can see where that would be attractive. In talking to advisors, one thing that comes up or a couple of things that come up with multi-asset income strategies in general. And that is the variability of the return, the total return, when compared to their expectations. And also, more specifically, when talking about what we're talking about today, is the variability of the income. So, have you any views on that?

SH: Well, I think that's probably a fair comment. And I think it's partly because some funds in the past have concentrated and looked at the yield rather than thinking about the income. So, obviously, the higher the yield, then perhaps the easier it is to sell the fund into the market, as people are often looking at that. But what that means is that you're often, as an investor, chasing the higher yielding investments and quite often that means you're looking at the more risky companies or more risky bonds, and it's just not sustainable that level of yield in terms of what income is delivered. So I think that's often part of the problem, is that that focus on yield has led to people investing in things that are just too risky to deliver a consistent level of income.

So, it's really difficult for advisors when you have an inconsistent and perhaps falling level of income. What we think is really important is that you look for that consistency of income. So, you look for the types of investments that are going to deliver growth, but also to make that stability of income and not chase a particular yield number, which is a mistake that has been made in the past.

PE: Yeah, I think that's fair. A lot of the multi-asset income funds that I've researched do take that approach. It's yield in, yield out, really, which does provide that inconsistency in the level of income provided. So, what type of income are you trying to achieve? What does it look like?

SH: So, we think it's really important for what retirees want is to have an attractive level income, but importantly, a stable level of income. So, what we're looking for is to generate a stable and attractive level of income. And we're looking to maintain the purchasing power of that income over time. That's really important for retirees. So looking to grow that income at least in line with inflation over rolling five-year periods, but also to grow the capital in line with inflation. That's really important too.

And, really importantly, it's about having the stability so we limit the drawdown on the strategy, so we don't want the income to fall by more than 10 per cent in any given year, just to provide people with that reliability and consistency of that approach.

PE: So how do you go about doing that?

SH: So, the first starting point is to have a wide selection of investments that you can invest in. So, we look at nine different asset classes in our strategy. We look at equities. We look at real assets, what we call property and infrastructure, real assets. And then in fixed income, we've got a variety of different bond types in there. So government bonds, corporate bonds, emerging market bonds. So, we've got lots of different things going on within these different asset classes. The equities are able to deliver the real growth in income over time. Your real assets, property infrastructure, would typically deliver income that is growing in line with inflation at least, so more kind of real stability. And then the fixed income is there for even more stability in terms of those income flows and a higher level of income. We know it's not growing so much over time, but it's delivering a nice high level of income.

So, what we do is we optimise a mix of assets in order to hit those objectives I was telling you about in terms of a stable and attractive level of income that grows in line with inflation and actually works out round about a third in equities, a third in those real assets and a third in fixed income. That's what working through all the numbers tells us.

Now, of course, at any one point in time, there can be things happening in the market that change the valuations of different asset classes. So, we're not stuck to that strategic asset allocation. We have a tactical asset allocation as well. So we can move in and out of asset classes as we see opportunities develop or as we see risks develop and pricing warrants such a move. And that's really important so we can deliver a portfolio that is looking to bring that stable, consistent income over time.

PE: We've alluded to earlier the fact that a lot of your peers have more of a focus on yield, but there is quite a lot of other income strategies in the market that can't do what you do for a specific reason. That's the transparency of the underlying securities. So, where should advisors not look?

SH: Well, I think you're right. I think there are a number of other strategies that aren't able to do what we can do. So, model portfolio services, for example, and passive approaches, they don't have the visibility on the underlying income streams. And some strategies are also limited by their capital or total return volatility. And that can limit their asset allocations so that they can't have enough in the right income generating strategies. Whereas, we don't have those limits in terms of the capital volatility. It's all about income volatility for us. And we have the visibility on the underlying investments. So, we have between 250 and 300 individual investments in the fund. So across nine different asset classes, lots of diversification. And we have exact visibility on the income streams for each and every underlying investment. So, we have validated the income numbers, so we can forecast what our income is going to be over the next 12 months and indeed over the years that come.

So, that gives us a huge advantage in being able to say to advisors, look, this is how it's going to grow in the future. And I think a lot of other strategies just aren't able to do that. So from a retirees and advisors point of view, that would give me a huge amount of additional comfort.

PE: I would agree with everything you've said there. We found it incredibly difficult, actually, to find the sort of strategy that you articulate. There are a small number in the market, but not that many. Moving on, we've spoken before, I think, both of us, with regard to what is a safe withdrawal rate. What are your views on that?

SH: Well, this is a question I'm asked quite a lot. I think I would challenge the idea that there is a unique answer to this, and people bandy about 3 per cent or 4 per cent. And I don't really think there is one right answer. I think for us, we would think of what a safe withdrawal rate is, which is the natural income you can generate from a portfolio. And because we think we can do that, generate a good, attractive, natural level of income, keep the income growing in line with inflation, and keep the capital growing in line with inflation. So that to me is what a safe level of withdrawal is. And that allows the retiree to be able to plan for what they're going to be able to spend in their retirement. And it allows the advisor to discuss with a degree of confidence and foresight about how their pension pot will grow over time.

PE: Yes, I think that's right. If we should move along to the yield versus dividend income conundrum, because this is another thing we've come across quite often, where there's some confusion as to what the yield is telling you. I've come across situations where an advisor anticipates that when the yield's going up, then the income is going up. And when the yield's going down, the income is going down. And that's simply, well, it may be the case, but it often isn't the case, is it?

SH: It doesn't follow at all. I'm really glad you asked this question, because I think it's one of the biggest misconceptions out there. So, the yield is not, it tells you what's going to happen in the immediate future, so the next 12 months, but it does not tell you what's going to happen beyond that. And it can fluctuate wildly, as you allude to. So, you can imagine, let's say your income is constant, but there's a big market  fluctuation, capital values fall, the income divided by the capital tells you your yield and your yield will shoot up. But your income's not going up. Your income hasn't changed. And in fact, your income might actually fall over time. So, the yield does not give you a good idea of what's going to happen to your income. If I could illustrate this with a, if you think about a high-yield bond fund, versus an equity fund. So, a high-yield bond fund has a nice, attractive level of income, most likely. But that level of income or that yield tells you what level of income you're going to get. And the equity fund may have a much lower yield on the fund. But what we know is that the high yield bond fund, that income is fixed. It's not going to rise from there. And actually, against inflation, it's going to be eroded in real terms. So effectively, that's coming down over time, your income, in real terms. Whereas the equity income, although it starts with a low yield, is growing every year, in real terms, it can grow ahead of inflation.

So, for the first year, your high yield bond fund will give you a higher yield and a higher income. But over time, even though the yield will still be higher than the high yield bond fund, the income will be growing on the equity fund. And I would argue that for a retiree, you shouldn't be thinking about the next 12 months, you should be thinking about the next 12 years, 24 years, 36 years, and therefore you really care that that income is growing over time. And that's the real thing you should be looking at. That's what really makes a difference to you over time, how that income grows, and not just that difference in yield in year one, which just tells you the next year.

PE: Another thing I think that there's an obsession in our industry with regards to risk being seen as the volatility of capital. That seems to be the primary determinant of risk. I'm very sceptical about that, personally. But with regards to an income strategy, such as the one that you articulate, surely it's the predictability of the income stream or the volatility of the income stream that we should be looking at?

SH: Yeah, I'm in danger of agreeing with you on every question here, but I think you're absolutely right. So, when we set up the strategy, we were very clear that the biggest risk here for the retirees that will invest in this fund is their income doesn't grow and doesn't keep pace with inflation and is too volatile. So that to us is the big risk. The capital volatility isn't actually as important to them, because if they're using the natural income derived from the strategy, then they don't need to sell capital. So, the capital can have some volatility. It doesn't actually matter to the retiree as much, because it's the pounds and pence that they get in terms of their income that covers their regular spending needs. That's the key thing.

And so, you don't want to have to be forced into selling down assets if you follow a capital withdrawal strategy. So, for us, it's the income volatility that's the most important thing. And that feeds through into the type of assets that we are investing in, in the strategies. When we invest in equities, for example, we're investing not in the high-growth speculative equities. We're investing in equities that are very stable, have some decent degree of growth, but a proven dividend stability record in there. The same with the bonds. We're not investing in the riskiest of bonds. We're investing in bonds that we are absolutely sure they're going to pay their coupons. And that allows you to have real confidence as an advisor when you're talking to your clients that we're really looking ahead at that income volatility. That's the most important thing to us here, is that we don't see the income drop down by any more than a small margin at any one point in time.

PE: Now, this particular type of strategy completely changes, in my view, the type of conversation an advisor would have with a client. You were talking about the predictability of the income versus the unpredictability of capital. At what stage do you think an advisor should hope to introduce this to a client? At what point should they do that?

SH: Well, I mean, I think you should start to be talking about this ahead of retirement, ahead of your decumulation. And I mean, as you're moving into that phase anyway, you would normally be de-risking a bit from your full growth accumulation strategy and moving into something that is more balanced. And that's really what our monthly income strategy is. It's a diversified multi-asset strategy with weights across all the different asset classes, which I think is very appropriate as you're phasing out of the full growth stuff towards retirement. And maybe you want accumulation units, for example, before you switch to income units over time. But I think you would like to have that conversation approaching retirement so that you're able to have a fairly seamless transition as you move into retirement, and you can show your clients exactly where the income is going to come from and have the predictability. So, it would make sense to me to start that conversation early.

PE: I think the visibility over the potential income stream is key there, I think. I think we've covered quite a lot of ground, Steven. I think to sum up, we've looked at the kinds of risks that advisors need to take into account when going down the capital withdrawal route. We've looked at natural income as a potential solution to some of the issues surrounding sequencing risk and how that can help. Then we looked at some of the practical implications of putting this all together for an advisor's business. So, I think all I'd like to do is just say thank you very much for your time today.

SH: Thank you. Thanks for the opportunity.

PE: I've enjoyed the chat. It's great to see you in Edinburgh this time. And that's a goodbye from me.

Important information and risk factors

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This communication was produced and approved in September 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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