Traditional sources of income, such as bonds, are no longer delivering reliable yields.
Growth has also been a problem. The average return from IA-listed funds with income and multi-asset, multi-manager or multi-strategy or multi-asset distribution in the title equated to -1.2 per cent to investors in the past year to May 25 2016.
But Nathan Sweeney, co-manager of the Architas MA Active Intermediate Income fund, observes the backdrop is also difficult. “The way in which people invest for income has changed. If you were to roll back 10 years, if you put money into the bank you got 5 per cent, inflation was running at 2 or 3 per cent so you were up 2 per cent. You cannot do that today.
“You could invest in government bonds a few years ago and get the same outcome. You got a yield of 3-4 per cent. Now we’re in a very different period. If you put your money in the bank you get nothing. If you put your money in government bonds you get virtually zero.”
Many of the multi-asset income funds launched in the wake of the pension reforms are promising 4 or 5 per cent yields. So can they continue to deliver? Perhaps, but only if they look beyond the usual sources of income.
Michael Schoenhaut, manager of the JPM Multi-Asset Income fund, acknowledges 2015 was a challenging year for multi-asset income investors.
He says: “Looking back, those that tried to find the highest-yielding asset classes at the start of the year such as US high-yield CCCs or MLPs [master limited partnerships], might have been satisfied with the yields they were being paid – 10.0 per cent and 6.5 per cent, respectively.
“However, 2015 was a bad year to stretch for yield. To put this in perspective, investing in the Barclays US High Yield 2% Capped Caa index and the Alerian MLP index would have resulted in respective 2015 total returns of -12.1 per cent and -32.6 per cent.”
Newton Multi-Asset Income
Paul Flood runs this £16m fund, which has made it into the IA Hidden Gem Club 2016 in the Mixed Asset Income category. His objective is income with the potential for capital growth by investing in a diversified multi-asset portfolio. The fund launched in February 2015. FE Analytics reveals in the 12 months to May 25 2016 it generated a 1.2 per cent return, compared with the IA Flexible Investment sector average of -5.4 per cent. A geographical breakdown shows the portfolio has 38.8 per cent in the UK, with 19.5 per cent in North America and a 16.7 per cent allocation to Asia Pacific ex Japan.
Fidelity Multi-Asset Income
Eugene Philalithis is the manager of this offering from Fidelity, which aims to provide a sustainable income with asset class selection based on an assessment of the current economic scenario. This £151m portfolio has outperformed its peer group, the IA Mixed Investment 0-35% Shares sector over one, three and five years, FE Analytics shows. Over five years to May 25 2016 it has produced an impressive 31.4 per cent, compared with the sector average of 18.1 per cent. Income assets account for 32.2 per cent of the fund, while growth assets make up 29.8 per cent.
CF Seneca Diversified Income
This £100m fund is a member of the IA Hidden Gem Club 2016 in the Mixed Asset Income category. It launched in April 2002 and is managed by an investment team including Peter Elston, chief investment officer at Seneca. The aim is to generate a high level of income by investing in a multi-asset portfolio with a focus on value. An asset breakdown shows the portfolio has 26.6 per cent in UK equities, 30.2 per cent in fixed income and 23.4 per cent in specialist assets. According to FE Analytics, the fund delivered 11.6 per cent in the three years to May 25, while the IA Mixed Investment 20-60% Shares sector average was 7.3 per cent.
Therein lies the advantage of multi-asset strategies. With their ability to invest across the asset class spectrum, managers are able to mine alternative sources for income.
Mr Schoenhaut adds: “Clearly multi-asset funds can provide a differentiated source of return for investors. Timing the market can be difficult, and especially in times of market volatility, having a diversified mix of assets is invaluable.
“We believe the growth in multi-asset strategies will continue because the flexibility of these strategies allows them to tilt towards the best opportunities in an asset class or region, without taking unnecessary concentrated risk that single-asset class funds may take on.”
Mr Sweeney points to alternative assets, such as property and infrastructure.
He confirms: “People talk about the hunt for yield – you have to go out and find it. I’m not saying it’s hard to find it, you just need to think differently about the way you look for that yield. It’s not looking at traditional ways of extracting yield. The way we invest has changed over the past 10 years and become more complex almost, in terms of the product you can access to get high yield.”