Multi-asset income: how does it work?
With income a top priority for many investors, we examine the case for taking a multi-asset approach.
Traditional sources no longer offer attractive income
Investors seeking income are facing a different investment landscape now to in the past. Gone are the days of savings accounts offering high rates of interest, and safe government bonds with inflation-beating yields. Investors seeking higher real returns (i.e. returns that outpace inflation) instead may need to turn to different, higher-risk asset classes, such as corporate bonds or equities.
However, choosing which asset class to invest in, and when, can be a complicated decision and managing a portfolio is a time-consuming business.
Multi-asset offers diversification
The answer, for some investors, could be a multi-asset fund. As the name implies, these contain investments ranging across many different asset classes, including equities, bonds, cash, real estate and infrastructure. The fund manager decides what the appropriate proportion is going into each and this is actively managed over time in response to changing market environments.
In the case of multi-asset income funds, the emphasis will typically be on those asset classes producing a “natural” income, in particular high-yielding bonds, emerging market debt, real estate securities offering a rental income and high dividend-paying equities. Please see the end of this article for an explainer of the different income-generating asset classes.
A key benefit of multi-asset funds is that they typically include access to a wider range of asset classes, geographies and investment styles than if an investor were to build their own portfolio. Investors can therefore access a diverse range of potential investments in a single fund.
Multi-asset portfolios can also be built with the aim of producing returns at a relatively lower level of risk. It is important to remember though that lower risk does not mean risk free, and the value of investments and the income from them may go down as well as up, as an investors you may not get back the amounts originally invested. There is no guarantee aims/objectives will be achieved.
The chart above gives an example of how this works in practise. The x axis shows the volatility of the different asset classes and the y axis shows their current yield. As the chart demonstrates, many of the higher-yielding asset classes, such as local currency denominated emerging market debt, are also the most volatile. Meanwhile, the least volatile assets, such as investment grade bonds, offer relatively low yields.
The green dot represents an example of a multi-asset income portfolio. While this may not offer the very highest yield available, diversifying across asset classes and geographies can help to reduce volatility whilst looking to generate an attractive level of income.
The chart is only an example of a current multi-asset portfolio and the asset positioning may change in different market environments. Different multi-asset income portfolios may have different levels of volatility and yield amounts. The chart is not an indication of future performance and is for illustrative purposes only, it is not an offer to adopt any investment strategy.
Focus on risk-adjusted returns
Indeed, this is the point of multi-asset income funds for many investors: the idea is not to chase the highest yields regardless of potential risks, but to maximise potential risk-adjusted returns by considering a wide set of investment opportunities.
Such funds also offer the flexibility to respond to changing market environments, for example increasing the fund’s weighting to equities if the manager sees an attractive investment opportunity.
Why multi-asset income now?
After the rally in global asset prices since the 2008-09 financial crisis many assets now look expensive. This is particularly the case for bonds; their prices have risen as a result of quantitative easing programmes which saw central banks buy government and investment grade corporate bonds. Such programmes mean that bond prices have risen and yields, which move inversely to prices, have fallen.
With bonds expensive and providing little in the way of income, investors seeking lower-risk income may find a traditional bond allocation is not suitable for their needs. Such investors may choose instead to favour a multi-asset approach offering the ability to navigate an increasingly fluid and rapidly changing opportunity set.
If you are unsure as to the suitability of your investment please speak to a financial advisor.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Fund manager view
Remi Olu-Pitan, Fund Manager, Multi-Asset, says: “We expect to see more volatility in global markets as we head into the second half of the year. Against this backdrop, we believe a multi-asset approach can help clients navigate this environment while still providing an attractive level of income.”
Asset class explainer
High dividend paying equities: a dividend is a payment made by a company to its shareholders, usually annually. This payment usually comes from a portion of the company’s profits. Sectors with stable earnings tend to pay higher dividends while fast-growing companies with volatile earnings streams may not pay any dividend at all.
Investment grade and high yield bonds: investment grade bonds are those deemed high quality by a credit ratings agency, i.e. the company issuing the bond is thought to be at low risk of default. By contrast, high yield bonds are deemed more risky and therefore pay a higher yield to compensate the investor for the extra risk they are taking with their capital.
Emerging market debt (EMD): emerging market debt refers to debt issued by less developed countries, or by companies from those countries. It can be issued in US dollars or in the local currency. Investing in debt issued in the local currency can be seen as an attractive option if that currency is expected to rise in value.
Infrastructure debt: issuing debt instead of obtaining a bank loan has become a popular way to fund infrastructure projects. Infrastructure debt differs from other corporate debt in that it is associated with a real asset (for example, a power plant or a toll road). These tend to be long-term, illiquid investments that would be near-impossible for an individual investor to access.
Real estate: there is a low correlation between returns from real estate and returns from equities and bonds, meaning real estate is an important part of a diversified portfolio. Real estate investments can be commercial or residential and offer stable income in the form of rent paid by tenants.