Multi-asset investing: 'dynamic approach' needed to meet income goals
Diversifying exposure across multiple areas of risk, including credit, equity and interest rates, can allow risk-adjusted yields to be maximized and investors’ income goals to be met, according to a recent report by Franklin Templeton.
While volatile markets also expand the income-generation opportunities available for savvy investors,
Monetary policy normalization has made this possible, the paper said, as volatile markets expand the income-generation opportunities available for savvy investors
“But it requires a dynamic and flexible approach to portfolio construction, in which a broad range of investable yield-bearing assets are analyzed. This ensures that capital remains fluid, ready to be redeployed between assets,” the note added.
“As an example, the recent steep rise in interest rates across developed economies has increased the yield available from low-risk, cash-like assets. Many investors are likely tempted to concentrate their portfolio in these instruments, influenced by the perception of healthy yields, but rising rates have also pushed up yields on long-duration government bonds, which offer the added advantage of capital appreciation in the event of a downturn.
“Elsewhere, rising rates have impacted credit, creating attractive income-generation opportunities within the capital structure of companies.”
The report further explained the recent period of post-pandemic monetary policy tightening had created a more volatile environment for all asset classes.
Amid slowing growth and an uncertain economic outlook, an extended period of structurally higher inflation seems very likely in developed market economies, meaning interest rates will remain elevated, if not as high as they were in the latter part of the 20th century.
The paper added: “While higher interest rates are a welcome element in income-oriented portfolios, higher inflation alongside higher volatility across all asset classes poses some difficult questions around portfolio construction.
“Inflation can reduce the value of capital, while frequent market drawdowns can make income withdrawals more costly, as dollar-cost averaging impairs value during a rebound.”
Another example highlighting the importance of diversifying risk can be found in the equity space. Stocks appear less attractive now than they have in recent years, given high-interest rates and slowing global growth.
This might prompt income investors to move away from stocks in search of yields elsewhere.
However, the paper said, keeping elements of a portfolio in dividend stocks was “advisable”, given the potential for capital appreciation, alongside the powerful effect of dividend reinvestment.
