Investment Funds – Income vs Growth: Why not both?

James Rowbury of Walker Crips Stockbrokers

James Rowbury of Walker Crips Stockbrokers - Credit: Archant

How a bespoke investment portfolio could benefit you in the long and short term.

Walker Crips Stockbrokers

Walker Crips Stockbrokers - Credit: Archant

Traditionally, Investment Funds have classified themselves in two ways; Income or Growth. An income fund offers investors regular cash distributions from company dividends. A growth fund will, generally, invest in smaller, expanding companies to increase the value of the invested sum. The conventions allude that a growth fund is for younger investors, with a long term investment horizon and a larger risk appetite. In contrast, an income fund suits an older investor, who is likely reaching the end of a long working life, thus requiring a large defence of capital protection and a replacement for lost income. Both strategies can be effective in isolation, though, investment returns should not be constrained to one or the other.

Easy Money?

The last eight years has seen investors enjoy a strong, but volatile, bull market. At the time of writing, the FTSE 100 has returned approximately 108% since March 2009, whilst its peer indices (FTSE 250 & S&P 500) have returned 216% & 225% respectively. Such returns have encouraged many to invest; yet numerous headwinds remain both globally and here in the UK, which may consequently have a moribund or possibly negative impact on future share prices.

When equity markets perform well and rising stock prices are observed, growth funds are in vogue and tempt many to participate; also known as ‘the herd effect’. Stock market booms in the 1990’s delivered growth investors outstanding returns, but blinded many to the inherent risks of the high growth, predominantly technology based companies. The so called bubble that imploded, at the turn of the Millennium, was a stark reminder of the dangers of momentum growth.

Playing the Long Game…

With these risks in mind and their potential impact on share prices, the key to long term investment success should be observed through “total return” (i.e. the combined return from both growth and income). Whilst capital growth is important, the impact of dividend income can often go unnoticed in portfolios; it is either being withdrawn, or omitted from performance figures. A well-managed portfolio looking for growth should be accumulating these dividends and re-investing them when appropriate.

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Finding the right blend of income and growth does not have a universal formula, owing to unique investor circumstances (e.g. tax liabilities, investment objectives & time horizon), nor is it an easy task. By focusing on a company’s ability to sustain cash flows, diversifying across a range of sectors and asset classes; a well-managed, active portfolio can achieve long term ‘Total Return’ through diverse and deviating market cycles.

The Walker Crips team in York has been providing specialist investment, wealth management and pensions planning advice to individuals and small companies for more than 35 years, and has been part of The Walker Crips Group, one of the City of London’s most established independent companies, since 2005.

We’d love to help you find out whether your portfolio could benefit from our investment management services. Please contact us on 01904 544300 to arrange a meeting with a member of our Walker Crips Investment Team or alternatively visit our website for more information.