Charities need to work their assets harder, says our investment columnist John Hildebrand
With economic growth likely to remain lacklustre for several years, the chances of interest rates rising any time soon are low. This might well mean that charities have to work their assets harder to produce a decent income. Fortunately, there are still plenty of ways of achieving a higher income while still adopting a balanced approach.
First, cash at the bank can be managed more efficiently. Money on overnight deposit tends not to have appealing rates, but the pressure to attract deposits means that a number of high-street banks are offering more than 3 per cent on money deposited for a minimum of one year.
Traditionally, the longer one invests, the higher the return. Normally, charities look to the government bond market as a way of achieving a reasonable yield to cash while not taking on too much risk. During periods of market stress, some government bond markets can be seen as safe havens, so the yields on their bonds drop heavily.
Those wanting a higher level of income will therefore have to look elsewhere. High-quality investment-grade corporate bonds yield more and one can invest in three to four-year bonds issued by quality companies with gross redemption yields of 3 per cent. Once again, longer dated stocks yield more and it should be possible to pick up a good income stream without sacrificing much capital.
Equally, UK equities currently have attractive income streams: 34 companies in the FTSE 100 yield more than 4 per cent. The yield on the FT All-Share index is currently 3.3 per cent and most analysts expect dividends to grow by about 6 per cent in 2012.
Overseas equities tend to yield less, but this is partly because of the large weighting of US and Japanese shares in world indices. Australian, Brazilian, Chinese, French and Italian shares all currently yield more than UK shares and it is perfectly possible to invest in higher-yielding equities in countries such as the US.
Outside these traditional asset classes, both property and infrastructure assets offer attractive yields.
So while there are dangers in distorting a portfolio too much just to generate income, there are plenty of opportunities out there that provide a decent level of return.
John Hildebrand, an investment manager at Investec Wealth & Investment