M&G Episode Income fund manager Steven Andrew believes income investing still faces a “structural” challenge despite some cyclical threats having passed.
Speaking to mark five years since the launch of his £422m multi-asset fund, Mr Andrew said the main challenge in reaching his annual income target of 4 per cent was “past its most painful point”, as bond yields had moved off record lows.
However, he said that if all assets re-priced to the level previously seen in bond markets, where US 30-year treasuries were yielding 2.2 per cent, then “everything” would become too expensive and the 4 per cent target would appear unattainable.
He said: “We are through that in a cyclical sense but not a structural sense. We are probably going to experience an increase in yields before something else happens that forces them to compress again.
“I would not expect, from a cyclical sense, [for that] to come under pressure for the next three years. But beyond that if we get an economic downturn and we haven’t raised interest rates very much [which seems likely], you’re going to revisit some of those numbers.
“The challenge will be there for those that have loftier income aspirations.”
With regard to multi-asset income investing, the manager did not buy into concerns that asset managers opening up a raft of products in response to pension freedoms could over-extend the reach for yield
He said the nature of the multi-asset style meant it could avoid popular asset classes at times of over-valuation.
“There is a varying degree of outcomes for multi-asset, and it just so happens that if you’re good at it, or if people think you are, then they might trust you,” he said.
“Yes the market is getting bigger, [but] does that cause a problem? Only if your holdings aren’t liquid or easy to trade.
“In multi-asset you have the global investment universe in which to invest, so the ceilings are that much higher before volume becomes the concern.”
He said it was good that other fund houses were launching rival products, but acknowledged differentiating oneself was difficult.
“The market is not stupid; it does not look at the same information as you and conclude different things, it is perfectly capable of sorting out the facts.
“It just chooses not to sometimes and chooses to be distracted. And that would our differentiated factor in terms of how we think.”
He said the main drivers of his investment process would continue to be understanding the source of volatility, and forcing a distinction between this and risk. Another key plank was understanding how the market makes its decisions, he added.
“If [market decisions] are [driven by] a cold assessment of underlying facts then fine, but if it is being driven by the chaos of the moment, then we hope we have been diligent enough and know when to stand on the other side and when not to.”
M&G Episode Income has returned 57.3 per cent over the past five years, according to FE Analytics, compared with an average return of 24.4 per cent for the IA Mixed Investment 20%-60% Shares sector.
