Building a multi-asset income portfolio

This article is part of
Guide to managing a multi-asset portfolio in a crisis

Building a multi-asset income portfolio

Advisers seeking to build a multi-asset income portfolio for clients have seen their options shrink over the past decade.

Once upon a time, such a portfolio could have contained UK or US government bonds with a secure income and a yield of 3 per cent or more, combined with a reliable equity income yield from regular dividend payers such as companies in the oil and financial sectors. 

But with the UK 10-year government bond yield currently sitting at less than 0.3 per cent, and many of the traditional dividend-paying companies cutting or cancelling their payments, the road to a reliable income for clients has never looked rockier.

Wayne Berry, investment manager at Brewin Dolphin says the changed world in which we live means one of the historic rules of investing, which is to not pay income from capital gains, may have to adjust, too.

He believes with bond yields at very low levels, and equity markets generally rising and thereby generating strong capital gains, paying income from those gains is the way forward. 

Looking for income

Others are taking different routes. Peter Fitzgerald, multi-asset investor at Aviva Investors, says: “It’s a huge challenge to generate an income in these market conditions; the lower-risk assets don’t have an income yield at all really.

"One of the areas we are looking at is commercial property. We think this is an area where yields are strong, and while there is understandably a lot of concern around the impact of Covid-19 on the commercial property market, not all parts of the market will be impacted negatively.

"On top of this, if employees want more space, or need to be more spaced out at work, that could actually boost commercial property.”

Mr Fitzgerald also uses call options to generate an income. This involves receiving a small payment now which can be used to pay a dividend to investors, in exchange for giving up some of the future share price gains made from a stock.  

Stephen Hay, who works on the multi-asset income fund at Baillie Gifford, says one of the ways he has been generating income for clients has been through investments in infrastructure assets. 

Many of these derive their income from government revenues, making them particularly durable. In some cases, this revenue is inflation linked, thereby offering additional protection. About 20 per cent of his fund’s capital is deployed into infrastructure assets around the world.          

Paul Flood, multi-asset income fund manager at Newton, says he uses alternative income products including infrastructure plays. But he also turns to real estate investment trusts that offer exposure to niche parts of the property market which are likely to benefit from structural changes in the economy.