Generating income and capital growth – never the two shall meet?

It is a commonly held belief that investors must target either income or capital growth. We are told we can have the safety of income through bonds, or the volatility of capital growth through equities, but that both in a single portfolio would be the investment equivalent of ‘having one’s cake and eating it’. To deliver good customer outcomes, investment needs to be innovative. Investment solutions should not expect to conform to rules that themselves erode through time as the financial market evolves.   

The world has gone through plenty of changes recently. The pandemic feels more distant, while others feel more obvious today, such as the cost-of-living crisis. In many ways, our journey from the pandemic to perceived normality paved the way for higher global inflation and, in turn, higher interest rates. Excessive money supply in response to lockdowns, and supply chain crunches as we emerged from lockdown, sowed the seeds for the world of higher yields we live in today. For many savers, higher interest rates now provide a viable source of income, albeit one that is below inflation. In real terms their income is lower, even if they feel nominally richer.

In the post-Great Financial Crisis world, particularly in the immediate aftermath of the pandemic, we convinced ourselves that we didn’t need dividend income from equities. The investment world was happy with capital gains from high-growth businesses. Whether they made money or not, those companies were the future. Valuations slumped for traditional cashflow-generating businesses that showed capital discipline by paying excess profit back to shareholders. If you could reach a global audience of billions with a couple of clicks, investors were hooked. While these businesses undoubtedly have a role to play in the global economy, the ability to finance them is now structurally challenged.

Through all the comings and goings of the past decade, one conclusion is clear. The key to consistent long-term performance is the ability to lean into the right sectors, the right businesses and the right part of the capital structure. In doing so, investors can generate returns through both income and capital. Taking this unbiased approach allows a portfolio to adjust its return profile as the economic cycle dictates. This has been a key philosophy in managing the LF Canlife Diversified Monthly Income Fund. Guided by pragmatism, the fund seeks to combine the safety of income through bonds with the potential for capital growth through equities.

This approach is deliberately straightforward. Returns are driven by careful portfolio construction from the fund managers and supported by rigorous research and insight across all the asset class specialists at Canada Life Asset Management who focus on stock selection. The result is a portfolio that targets a yield of 4% per annum, and income that we aim to grow in line with inflation. The fund aims to pay a smoothed income, with a minimum monthly payment across the year combined with quarterly and annual enhancements where there is excess income remaining in the underlying dividend ‘pot’. This differentiates the strategy from other monthly income funds, where there can be material swings in monthly payments. We believe our approach gives greater certainty and stability to investors, who are better able to manage their own costs and expenses with a high likelihood of a consistent income.

Clients who typically access retirement income planning do so through bonds and in today’s world of higher yields this is more feasible than in recent years. These bond solutions can seek income from different forms of fixed income such as high yield, mortgage-backed, or emerging market debt. However, with inflation still high and arguably ‘sticky on the upside’, the real income that clients are receiving is arguably not enough to support higher living costs in retirement.

To help the fund achieve real income growth, we dynamically allocate to both yield-producing and capital-generating assets. This relative value mindset differentiates the strategy from traditional multi-asset vehicles in the peer group. In allocating a portion of the portfolio to equities to help with capital generation, we also aid in achieving the annual income target. Equities themselves are a good pass-through vehicle for inflation as stronger businesses with pricing power can pass on these costs; in a more inflationary environment, it is important to use all the tools at your disposal.

In seeking to generate the annual yield target, whilst allocating to assets outside of fixed income, the LF Canlife Diversified Monthly Income Fund has an implicit total return strategy. This differentiates the fund from many other retirement income solutions.

As the global economy moves away from a long period of low interest rates to one of structurally higher rates, we believe that investment strategies must evolve. What worked well in the previous regime may struggle, while businesses generating robust cash flows and paying out dividends are likely to gain prominence again.      

Commentators often talk of an uncertain future and today’s environment is no different. We would also expect the industry will continue to offer products that exclusively target either income or capital growth. However, if an investment approach is built on being pragmatic and not dogmatic, if it seeks to generate returns across the multi-asset class spectrum, unhindered by behavioural biases, then maybe investors can have their cake and eat it. 


Important Information

The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate.

The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.

The fund may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.

This article is issued for information only by Canada Life Asset Management. This article does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Promotion approved 05/05/23