Investors must start being smarter about their income since the most promising sources of income lie outside the mainstream of equity income and, in particular, overvalued government and corporate bonds.
At a time when cash is no longer king, a prudent and diversified income strategy has become a prerequisite. Today, investors are facing one of the largest bubbles ever – in risk aversion – and yet a recent YouGov survey showed private investors are in no rush to rotate.
Risk aversion has become the default for private investors, with 71 per cent saying they are not willing to take any investment risk, but they are all going to turn out to be wrong. At a time when cash earns nothing and inflation is quite strong, they have to be doing something else.
It is only in the past five years or so that investors have had to worry about generating income from their investments as, previously, cash deposits took care of themselves and beat inflation. However, interest rates are not going to rise any time soon and, even when they do, the banks are more likely to take the opportunity to repair their balance sheets than pass any rises on to savers.
As such, the income conundrum is here to stay. There are a lot more people with cash on deposit who need income and yet, at the same time, yields available from more traditional income solutions are considerably less than they were only a few years ago. Investors and their advisers are going to have to do something different – the ‘old’ way of buying an equity income fund, a corporate bond fund and maybe a bit of property is likely to much less rewarding in the future compared with a more modern and adaptive solution.
Investors have to look broader and more globally. They have to diversify. They need to identify a pool of different assets that are uncorrelated from an income point of view. Investors and advisers to look beyond the usual equity income and bond suspects.
While UK property remains a problematic area for income investors, opportunities certainly exist internationally. As an example, Barclays Asian Real Estate Income has, for the past four years, yielded more than 10 per cent and often more than 12 per cent. It invests in a portfolio of 20 Asian real estate investment trusts and employs a covered-call strategy to enhance the income.
There are plenty of interesting income-generating options out there. If you buy the same assets as everyone else you will receive the same returns and that will not work for investors in the end.
Diversity of income – as opposed simply to looking further afield – is vital in these less than predictable times. When you buy funds you cannot know exactly how they will work out. Investors should not to make the obvious choices. There are plenty of smaller funds that will do better and investors should be in on that. There are funds all around the world producing greater income with less volatility and better protection of capital. So why not seek them out?
Gary Potter is co-head of the multi-manager team at F&C
