Multi-asset managers are searching for alternative sources of income as bond yields and dividend payout ratios remain at historically low levels.
Gavin Counsell, multi-asset manager at Aviva Investors, is using a range of sources, including derivatives, to generate a reliable income stream. ‘We hold derivatives positions that will benefit from long-term yields rising quicker than short-term yields,’ he said.
Eugene Philalithis, manager of the Fidelity Global Multi Asset Income fund, is increasing his allocation to specific areas of US and European loans. ‘These are generally issued by high-yield companies,’ he said. ‘The income is floating rate and they are more senior than bonds in the capital structure.’
He is also finding selected equity opportunities in infrastructure and global financials. ‘Financials equities often do well when interest rates rise and yield curves steepen,’ he said. ‘They also offer attractive potential for dividend growth.’
Philalithis sees dividend growth opportunities across Europe and Asia, where payout ratios are still low compared with other markets. ‘We also have exposure to aircraft leasing, which sits alongside infrastructure and pays a nice level of yield,’ he said.
A different approach
Will McIntosh-Whyte, assistant fund manager on the Rathbones Multi-Asset Portfolios, shuns infrastructure names, which he believes are on significant premiums. ‘We don’t own aircraft leasing as we think this is an untested model and a concentrated credit risk,’ he said. ‘There are also questions over the second-hand value of planes if the credit fails.’
Instead, he prefers selected equities and bonds, alongside a small allocation to structured products. ‘We are using bonds but keeping very short duration, so we don’t have too much interest rate risk,’ he said. ‘We’ve got some gilts but have more corporate bond exposure.’
He is also buying equities with strong balance sheets and robust growth prospects.
‘Rentokil targets 5% to 8% organic growth and a 1.4% dividend yield. It has performed very well and its future growth prospects will help grow the capital of our fund,’ he said.
Mark Jackson, a client portfolio manager in JP Morgan’s Multi-Asset Solutions business, believes it is important for the JP Morgan Multi-Asset Income fund to be diversified by sector and geography. ‘Our investment universe spans a diversified opportunity set of global bonds and equities, Reits and other asset classes on an opportunistic basis,’ he said.
He has spotted equity opportunities in recent months, while high-yield credit provides attractive risk-adjusted income. ‘We continue to diversify our credit exposure with allocations to alternatives, such as preferred equity and non-agency mortgages. These provide diversified sources of income,’ he said.
Expecting the search for income to remain a challenge, Jackson said, ‘The ability to be flexible in a strong risk controlled framework will be key in seeking out new or alternative sources of income.’