Building a multi-asset income portfolio

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

A balancing act

James Mee, who works at fund house Waverton, is similarly exposed to alternative income assets, but invests in the debt of those businesses, rather than the equity. 

Balancing income with prudence is an increasingly tricky equation, however.

Dan Kemp, chief investment officer for EMEA at Morningstar, says investors who take on additional risk to achieve a higher yield, are increasing the risk the income achieved will not be sustainable and so be cut in future. 

He adds that it is “difficult to see” how a client can achieve a sustainable and attractive income without paying some of this capital. 

Will McIntosh-Whyte, multi-asset fund manager at Rathones says: “In our view, when managing any portfolio you have to get the risk right first, and an income portfolio is no different. There is little use in chasing optically high income in the dark and dangerous corners of markets, as when investors experience the inevitable periods of market stress during the life of their investment, the likelihood is you’re taking far more risk to capital than you’d be comfortable with - think mini bonds.

"We won’t go chasing income for the sake of income, and the first judgement is always whether we are being compensated for the risk we are taking, and if the risk makes sense in the context of the wider portfolio. Income can easily act like the fabled sirens luring many an investor onto the rocks to sink their portfolio.

"Diversification is key, and not just among asset classes, but also in the function of each of the assets in a portfolio – what is it there to achieve, and how does it perform in stressed market conditions? Securing a mix of assets that perform differently will ensure enough diversification to weather potential storms.”

He concludes: “Ultimately retirees may need to think in terms of cash flow rather than income, living off capital gains and income combined. Whatever they choose, they are probably going to have to adopt more risk in the future to maintain their lifestyles.” 

Risky affair

Keith Balmer, multi-asset fund manager at BMO GAM, says a major mistake being made by some investors is that they “reach for yield”, that is, take more risk than is appropriate in order to achieve a higher yield.

He feels that a yield of 4 per cent remains attainable without taking excessive risk, and that corporate bonds offer attractive income.