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View the article online at http://citywire.co.uk/wealth-manager/article/a737519

Income hunt: innovative investors turn to unconventional sources

by Eleanor Lawrie on Mar 05, 2014 at 09:51

But Harley cautions that ‘with higher income usually comes higher risks’. So having a significant exposure to high yielding niche sectors could mean volatility if the market turns.

Meanwhile, Citywire A-rated manager James Vokins, who works across Aviva’s fixed income fund range, has noticed a surge in demand for tier two ‘cocos’, or contingent convertible debt instruments. Issued by banks, these securities give investors a coupon, like a bond, but can be converted into equity by the issuer.

‘They are very much in the limelight. There is a lack of alternatives yielding anything near as interesting as this,’ says Vokins.

Some order books for banks issuing cocos are 10 times oversubscribed, he adds, with demand coming from all types of investors.

‘There is strong demand from traditional long-only fixed income investors, hedge funds and even equity investors.’

The Aviva team are not keen on the original tier one cocos, as they say that in spite of an attractive yield they believe there is a weak structure. But the newer tier two cocos ‘compensate investors a lot more’, Vokins says.

The Aviva Monthly Income Plus fund has backed cocos issued by Credit Agricole, which yield around 5%.

Russell Waite, CIO at Affinity Wealth, also has global convertibles on his radar.

‘We are looking at convertible bonds as a unique asset class, as they “straddle” both equities and bonds. Investors can enjoy a stable income via the coupon element of the bond, but also participate in the potential equity upside created by the optionality of the conversion terms. With growing uncertainty around the future direction of fixed income and equity markets convertibles effectively offer an “each way” bet, which has a lot of attractions,’ Waite said.

In his view, talented managers and alpha generators operate in this space. The team favours RWC, Jupiter and Polar Capital’s strategies.

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1 comment so far. Why not have your say?

S McGee

Mar 08, 2014 at 08:38

.. it is this sort of desperation ... at these sorts of premiums .... that is cause for concern

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