Bish Limbu, manager of the Omnis Distribution fund at Octopus Investments, looks at the options for income-hungry investors.
After a turbocharged first few months of the year, recent market setbacks have given investors pause for thought. Talk of a ‘tapering off’ of US quantitative easing measures, falling Chinese growth numbers, uncertainty about Japan’s inflation plans and a stagnant eurozone have all prompted short-term bouts of profit taking from investors.
In fact, this year’s rally has been an inherently cautious one. Recognising that the improved economic outlook is mostly down to the cheap central bank money still flooding into the system, investors have opted for the comfort of developed market defensives, rather than more risky plays such as emerging market growth.
There have been plenty of market participants who have been content to take profits where appropriate, but just as many are on the sidelines waiting for the opportunity to get back into the market. But where should this money be going?
The ‘not-so great’ rotation?
The value of income diversification
Much of the talk from within investment circles during 2013 has been around the ‘great rotation’ but this myth has already been debunked. There is a rotation taking place, but this is currently confined solely to fixed income, with investors moving further up the risk spectrum in order to search for yield.
One could argue that the search for yield has been swallowed up by the “reach for yield”, with investors over-extending themselves, taking greater risks in pursuit of income. This suggests bond markets have entered bubble territory, and warning bells are sounding.
One suspects, though, that investors will be reluctant to ‘jump ship’ wholesale from bonds to equities until they’ve started to experience the pain of capital losses. Until that point, expect the game of chicken to continue, but with investors continuing to edge further up the risk spectrum.
Income-seeking investors aren’t interested in market cycles or rotating between one asset class over another. They would want an income-generating investment that is built to be consistent and sustainable.
They’d rather let their portfolio managers take those decisions on their behalf. A multi-asset, multi-structure, multi-manager approach is, in my view, the best way to ensure investors can avoid the income trap – finding themselves overexposed to one or two particular income streams.
Given the objective of delivering an income higher than inflation over time, asset allocation comprises a healthy blend of income investments, growing income investments and opportunistic income and growth investments.
The layer of diversification offered by this helps the funds deliver a more consistent yield, one that is less vulnerable to the fluctuations and volatility of a single asset class or underlying investment. Below are a few of the income-generating options currently available to investors.
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