Diversified income is a vital issue. Due to such factors as extended retirements and the recent pension legislation, a strong income stream for investors – particularly those of a certain age – is hugely important.
There are many reasons for diversified income’s increase in popularity. For example, the low interest rates that have pertained since the record low of 0.5 per cent, meaning that the value of your money in a bank or building society account is shrinking in real terms. With wage growth stagnating while the costs of goods and services are rising, each pound is now buying less.
Many income portfolio managers now favour diversifying their selected investments when trying to provide a strong, reliable income stream for their clients. Diversified income portfolios typically invest in a spread of income-generating investments with the aim of reducing risk, including income risk and capital risk.
For income investors, understanding the potential volatility of their income is likely to be more important than loss of capital. Diversified income portfolios also offer investors the benefit of accessing different sources of income, including different asset classes and across global markets.
There are numerous different types of income. For example, multi-asset income funds will invest in shares, fixed income/bonds, property, cash and alternatives – that is, non-traditional investments such as commodities or private equity. Successful multi-asset income portfolios bring together different assets and underlying investment in single portfolio with the right income, risk and return characteristics.
Such traditional sources of long-term income as UK equities, corporate bonds and property still have a very important role to play in diversified income portfolios. But delivering a sustainable long-term income also means staying nimble in terms of accessing different types of income opportunity and active asset allocation.
For example, some recent alternative income ideas include re-insurance, energy infrastructure, secured property debt funds and asset-backed securities. These ideas are blended with many other investments, but play an important role in creating a balanced income portfolio.
Despite a number of large natural catastrophes in recent years, premiums increased, followed by a period of no claims, which was obviously good news. In this area, like all areas, an important part of the selection process is picking high-quality, disciplined managers.
Many infrastructure projects have a degree of government underwriting, either securing the project finance or supporting future profits. This sector can provide something like government-backed income, not too dissimilar to an index-linked bond. In this area, some of the best opportunities can come in closed-ended funds.
Secured property debt funds have been found with yields of 6 to 7 per cent and no duration risk, which play on the bank retrenchment theme. New investments in this space have generally been asset-backed in nature so you have a sense of credit security, and in more instances than not, they are floating rate.