To earn attractive levels of income in recent years, many investors and their advisers have felt obliged to take bigger risks. We spoke to Helen Bradshaw of Quilter Investors about the importance of improving income diversification.
The key differentiating factor between many income-producing investments is the degree of diversification, says Helen Bradshaw of Quilter Investors, who has just launched two new risk-targeted multi-asset income portfolios. It's the power of diversification that allows risk-averse income investors to tap into some higher-return/higher risk areas such as private equity. The ability to blend different asset classes allows for a broader range of return drivers within a portfolio, helping to smooth out the journey for clients.
But she's not only talking about diversification aimed at preserving capital - the traditional focus for portfolio managers. "The flexibility of multi-asset also allows us to harness a great variety of income sources, whether that's in equities or alternatives, investment grade bonds, or from a particular region or investment style," she says.
Her two new portfolios, for example, might be drawing income from a small cap equity fund alongside shorter duration bonds, high yield or investments in infrastructure - a natural hunting ground for income investors given its long-term predictable income streams and typically low correlations to equity markets. "On the flipside", she says, "multi-asset also gives us the ability to avoid areas where the risk/reward is not so attractive. This in itself is an extremely powerful tool."
Diversifying income streams makes Bradshaw's job more complex. But she says that history is clear.
"Before the global financial crisis, the UK equity market offered a very nice yield but with this came huge concentration risks because much of the income came from banks," she says. The crisis then forced many banks to cut or suspend dividends - leaving income investors high and dry.
Bradshaw thinks there are now opportunities in UK dividends. "From a yield perspective, the UK is hard to ignore. Nearly 75% of companies in the FTSE All Share now yield more than gilts - a level we have never reached before. Worries around Brexit and the outlook for UK growth have weighed on valuations." She is aware of the headwinds too, however, and the need to diversify means she also looks to other asset types and overseas.
"Global growth is moderating but it's still at healthy levels", she says, "and companies in some emerging markets are becoming increasingly shareholder friendly and recognising the advantages of returning capital to shareholders". She thinks that, "emerging markets also offer significant opportunity for dividend growth."
But income investors need to be careful: some income funds in emerging markets or elsewhere may bias their portfolios heavily towards industry sectors or regions with higher yields, leading to the danger of relatively large sector or country skews. This in itself can lead to concentration risks and lumpy performance. Bradshaw hunts out funds that take a more balanced approach.
Click here to learn more about how Helen Bradshaw and her team engineered two new multi-asset Monthly Income portfolios to improve risk transparency and income diversification
For Investment Professionals only. Past performance is not a guide to future performance and may not be repeated. Capital at risk.
This communication is issued by Quilter Investors Limited ("Quilter Investors"), Millennium Bridge House, 2 Lambeth Hill, London, England, EC4V 4AJ. Quilter Investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543).
For further information and to access the KIID and prospectus for the Quilter Investors Monthly Income and Quilter Investors Monthly Income and Growth Portfolios, please visit: https://www.quilterinvestors.com.