A decade of ultra-low interest rates has pushed bond yields off a cliff and resulted in a forced migration by income investors into more volatile equity funds. But while the hunt for yield has become a real battlefield, there’s no shortage of attractive yield opportunities in less well patrolled parts of the market explains Helen Bradshaw
A decade of ultra-low interest rates has pushed bond yields off a cliff and resulted in a forced migration by income investors into more volatile equity funds. But while ‘the hunt for yield’ has become a real battlefield, there’s no shortage of attractive yield opportunities in less well patrolled parts of the market explains Helen Bradshaw.
If you’re serious about generating a consistent and sustainably high level of monthly income from a portfolio, you need to look a little further than the two former mainstays of the income investment world, namely the equity and bond markets.
While both still have an important part to play, with c$17trn of government bonds around the world now offering negative yields – and even Greece getting in on the act – it’s clear that the world has moved on over the last decade.
Meanwhile, although equity dividend levels have held up well, they’re just as volatile as they ever were. Thanks to different accounting practices and special dividends there’s little rhyme or reason to when companies in the same index choose to pay their dividends. This means that the income profile from equities alone is just far too ‘lumpy’ if you’re committed to delivering a consistent monthly income to your investors.
The alternative approach
The solution lies in widening the net to embrace a far wider cast of characters, especially those currently labelled as ‘alternative’. As part of a multi-asset class portfolio, a significant weighting to alternatives offers two great boons.
The first is the opportunity to invest across a far broader investment canvass by diversifying into areas that are less correlated to equity and bond markets. The second is the opportunity to create a far wider range of pay-out dates than the (generally) quarterly income distributions that derive from equity and bond funds.
For portfolio managers with the scale and resources it requires to properly research and trade in alternative strategies, there are rich pickings to be had.
Making it work
At first blush, few investors would expect private equity to fit snuggly in an income portfolio thanks to its reputation for volatility and low dividends. However, it’s a broad church and numerous managers in this space have set out their stalls to cater for income investors.
This knowledge led us to both the Princess Private Equity Fund, which focuses on Europe, and the Neuberger Berman Private Equity Fund, specialising in US opportunities. The former offers a reliable yield of around 6% thanks to a mature portfolio of high-quality real assets that range from private schools to discount retailing parks. Its veteran managers take a conservative approach to protect the dividends they pay-out which means the fund offers us a great way to diversify our European equity exposure.
