< Back to Publications Index

Income-only or total return investing? What you need to know about the choice facing schools 

News and ViewsPublicationsIncome-only or total return investing? What you need to know about the choice facing schools 
Income-only or total return investing? What you need to know about the choice facing schools 

'Given the greater flexibility offered by total return, such an approach can incorporate almost everything that an income-only strategy can, but without the disadvantages'

Guest author Andrew Pitt Head of Charities, Rathbones, London.

When did you last review your investment mandate – is it fit for purpose in today’s financial markets? Are you taking unappreciated risks in following an income-only approach? Have you considered the merits of switching to a total return approach?

Understanding the best available investment option is important for your school. This article contains the main highlights from our full white paper on the factors that schools should consider when deciding which investment approach to adopt.

Schools are increasingly asking their investment managers whether they should take an ‘income-only’ or a ‘total return’ approach. But why has interest in this subject increased?

Two major changes have been seen in recent years:

  • the investment choices available have increased greatly over the last two decades. While much of this ‘modern’ investment technology offers lower income yields than traditional instruments, it can offer greater capital appreciation and better diversification and risk management; and
  • interest rates and bond yields have collapsed in the last few years, making it increasingly difficult to generate reasonable levels of income. To fulfil traditional income-only mandates, investment managers may be consciously or otherwise placing the capital at greater risk and with it the school’s future activities.

These issues can be confusing, particularly if your investment manager appears to be delivering on your mandate – how can you assess the level of risk being taken to achieve a particular return?


Ease of identification

Any income arising from an investment portfolio is easily identifiable compared to capital appreciation, so it is easy to ensure that only income is spent and to assess whether you are achieving your income objective.

Reliability of income

A suitably diversified income-only strategy tends to produce a fairly stable level of income. Even in a recession, equity dividends tend not to decline as much as corporate earnings as directors try to maintain dividends to uphold shareholder confidence.


Income represents one of the more reliable measures of ‘value’. If there is no income (eg as with a commodity such as gold), it is more difficult to value an investment.


Current income levels are low

Today’s environment makes it harder than ever to achieve decent levels of income. One only has to look at the Bank of England’s base rate, which at the time of writing is 0.5%, to appreciate the scale of the problem.

An income-only approach may reduce your investment opportunity set

Investing for income-only introduces a bias against stocks or asset classes that pay little or no income. But does it make sense to ignore smaller, fast-growing companies that need to reinvest all of their profits to fund their growth?

Similarly, certain alternative investments such as private equity, absolute return funds, structured products and commodities can also be attractive. Should one exclude them and have a less well diversified portfolio, just because those asset classes do not produce dividends in the traditional sense?

Income is only part of the return

An income-only approach does not utilise any capital gains that might arise and, perhaps more importantly, ignores capital losses. If you strip out dividends, equities normally produce real capital returns over long periods of time, so why ignore this element? Equally, spending the income from a portfolio of conventional bonds is a sure way to end up with no portfolio over the long term.


Given the greater flexibility offered by total return, such an approach can incorporate almost everything that an income-only strategy can, but without the disadvantages.

It doesn’t matter that income levels are low

The fact that current income levels are low is not such a big issue for a total return investor.

A total return approach maximises your investment choices

A total return investor has the broadest universe of investments and asset classes to choose from. This offers benefits from both a risk and a return perspective.

Higher withdrawals?

A total return strategy may enable you to make a slightly higher withdrawal than if you pursue an income-only strategy because equities normally produce real capital returns over the long term.


Reduced ease of identification

A total return approach is slightly more complicated than an income-only approach, in so far as ‘identification’ of the return goes. This disadvantage is, however, relatively easy to overcome.

So which approach should your school choose: the reliability of income-only or the ability to better diversify risk with total return?

Our team would be delighted to explain the pros and cons of an income-only approach, and introduce the alternative of total return investing. We have considerable experience in helping schools to better understand complex choices like these. Call us today on 020 7965 7103 and let us discuss your school’s future.

The value of investments and income arising from them may fall as well as rise and you might get back less than you originally invested. Rathbone Investment Management Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

20 Oct 2015