Take multi-asset approach to income investing

PHOTO: Take multi-asset approach to income investing

With stock market gyrations becoming increasingly common in the past few years, generating a steady stream of income has become a key idea for many investors.

In fact, high-yield bonds in particular have outperformed traditionally high alpha assets such as equities, as investors sought the safety of yield to buffer them from volatility.

But with the interest rate outlook uncertain as central banks weigh up the costs of their monetary stimulus programmes, one trend that has picked up steam is to generate income from a range of assets rather than purely from fixed income assets.

It makes sense for investors to have "their fingers in both pies", as equities are likely to outperform bonds, said OCBC vice-president Vasu Menon. "Income will remain a key theme for investors. But at the same time, we favour equities as they provide stronger growth opportunities," he said.

The push for both capital appreciation and income is also an approach that Allianz Global Investors firmly believes in.

Taking a multi-asset approach to income investing can help shield investors from both volatility as well as interest rate shocks, said Mr Ben Tai, head of retail distribution in Singapore at Allianz Global Investors (AllianzGI).

"Challenging market conditions of low interest rates and fluctuating volatility have left many investors unsure of how to act," he said. "We think an income and growth strategy may represent a sensible solution for investors."

It is offering a fund called the Income and Growth Fund, which invests in US assets, and has a three-pronged approach to income investing.

First, it aims to generate a stable stream of income by investing in high-yield bonds. The fund also looks to tap on capital appreciating through the use of covered call options on stocks.

Convertible bonds, which pay an income as well as give the option for investors to buy shares of the company, are also a big part of the fund's strategy.

This means that the fund is cushioned against the potential of rising interest rates, as convertible bonds and high-yield bonds tend to have a low correlation to 10-year US Treasuries, which are used as a proxy for market interest rates.

The fund, which distributes dividends on a monthly basis and has returned 7.54 per cent a year over the past five years, also helps protect against market volatility because high-yield bonds tend to be less volatile compared to stocks, said Mr Tai.

Indeed, the last-minute deal in Washington to avert another financial crisis will also prove positive for stock markets, especially in the US, said Mr Menon.

The deal, which was struck early last Thursday, will reopen the US government and extends its debt ceiling till next February. But the 16-day US government shutdown may result in a slight negative impact on US fourth-quarter growth.

Still, Mr Menon remains optimistic: "The market has got used to the last-minute deals and we may see some positive spillover into risk sentiments, at least until the next round of negotiations in February."

The other piece of good news is that this could make the US Federal Reserve push back its decision to taper its monetary stimulus programme, said Ms Kristina Hooper, AllianzGI's US head of investment and client strategies.

"Further, if investors' psyches are severely damaged by these fiscal fights, then the Fed pulling away the punchbowl in October or November may send the stock market into a tailspin - something the Fed wants to avoid," she said.

"Therefore, monetary policy would likely remain accommodative for a longer period of time."

Over the longer term, Allianz believes that US economic fundamentals and the corporate sector remains healthy, said Mr Douglas Forsyth, portfolio manager for the Allianz Income and Growth Fund.

"Corporate fundamentals remain strong. Company balance sheets are solid. Leverage ratios and interest coverage ratios are near, or better than, levels seen in the past 20 years," he said.

"In this environment, we believe companies that have reasonable earnings visibility should command premium valuations relative to other companies."

aaronl@sph.com.sg


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