This has been an excruciating year for investors who depend on the income from their investments to live. Unfortunately, the persistently high inflation, central bank monetary tightening and increasing likelihood of a recession look like they will linger well into 2023, if not longer.
Under the circumstances, it’s not surprising that flows into GICs and other cash equivalents have risen dramatically, but as an income solution they fall short. Returns remain well below the inflation rate. Lock-in requirements and penalties for early redemption or any degree of flexibility can easily leave investors with negative real returns, and the income from these investments is fully taxable.
Correlation and diversification still key
Diversification is as important for income portfolios as it is for equities, and the sources of income need to be as uncorrelated as possible. Research and asset allocation have become an exhausting, time-consuming process, so it’s no surprise that outsourcing the income component of the portfolio is becoming more popular. We suggest that one way to quickly bump up the level of income diversification is through a managed program.
20 years of income generation
One of the earliest managed programs in Canada was Franklin Templeton’s Quotential program; in fact, this year marks the program’s 20th anniversary. Of its five globally diversified, actively managed portfolios, the aptly named Quotential Diversified Income Portfolio (QDIP) is designed to generate high, consistent income from multiple uncorrelated sources. Canadian and international fixed income assets form the core of the portfolio, but for added flexibility and performance enhancement, about one-quarter of the portfolio is invested in blue-chip Canadian and international equities selected for their income-generating dividend yields and long-term growth potential.
While QDIP is a solid investment in its own right, the effectiveness of the portfolio ratchets up when invested through Series T.
“T” is for Tax Efficient
Taxes can eat away at the income generated from investments, especially if clients are still earning a salary or receiving significant income from other sources. All Quotential portfolios are available in Series T, which offers a predictable stream of monthly cash flow, regardless of market moves. From a tax standpoint, Series T Return of Capital (ROC) distributions are treated more favourably than interest or dividend income. Taxes on capital gains are only payable if the investment is redeemed or when the adjusted cost base (ACB) reaches zero, allowing clients to keep more for longer.
This chart shows the results of $1 million invested in QDIP in 2003. The investor wanted roughly $3,000 per month to help pay for expenses. Eighteen years later, the portfolio was still worth over $1 million, but in the interim, it had also provided close to $800,000 worth of monthly income through ROC. Moreover, the ACB was still positive.
Franklin Quotential Diversified Income Portfolio – Series T
Growth of a $1,000,000 Investment at 3.5% distribution as of September 30th, 2022
For snowbirds and others who spend extended periods south of the border, distributions from Series T are available for Quotential Diversified Income Portfolio in U.S. dollars.
ROC on! ROC off!
For some clients, flexibility may be as important as a consistent flow of income. Series T ROC distributions can be increased or decreased on request at any time, which can be helpful in years when the client’s income or expenses are higher or lower than usual.
Showcase your value to clients
Launched 20 years ago this year, the Quotential Program offers advisors turnkey support in research, portfolio management and reporting throughout the lifecycle of the investment. Find out how our five globally diversified, actively managed Quotential Portfolios and the support offered through the program can help you free up valuable time for strengthening client relationships and building your business.
The QDIP-Series T idea was very well received in meetings we recently conducted with advisors. Not only does it reinforce with clients the concept that generating predictable, tax-efficient income from investments is possible regardless of the market environment, it’s also the type of creative thinking that clearly demonstrates the value of professional advice.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Series T distributions are automatically reinvested unless otherwise requested. Series T may also pay a distribution that must be reinvested in December, consisting of income and capital gains. Please indicate your preference to receive cash flow immediately on the application form.
The information presented herein is for illustrative and discussion purposes only and does not constitute any offering of any security, product, service, or fund, nor does it constitute any type of investment, tax or legal advice.
Maximum target annual distribution rate on Series T varies between 5% to 8%. Investors may choose their desired ROC cash payout rate and the remainder will be reinvested.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Equity and Fixed Income prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Franklin Templeton Investment Solutions, part of Franklin Templeton Canada. Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.