As the disclaimer goes, those who invest are putting capital at risk. But as markets continue to rise, it is income that has been in the most obvious jeopardy in recent years.
Mainstream markets such as the S&P 500 have stormed through several record highs in 2017. Portfolios have also received a fillip as previously unloved equity markets such as Europe and emerging markets return to form.
A positive story has also played out in the fixed income market. Government bond prices have remained high, while lower-quality debt has gained rapidly in value.
As such, it has most likely been a cheerful period for investors who simply want to watch their portfolios grow. But elevated market valuations, in part driven by loose monetary policy, mean that the yield available from traditional assets – equities and bonds – has dwindled.
In Europe, the returns from high-yield debt, commonly perceived as the riskier end of the fixed income market, have proved so great that earlier this year the bonds started to pay a lower yield than that produced from equity dividends in the region, according to Bank of America Merrill Lynch research.
As a result, the current environment presents a serious challenge for clients who need to generate an income from their holdings. This cohort has been growing, partly as a result of the 2015 pension freedoms.
This context can explain the rise of multi-asset income funds, which buy bonds and equities but in many cases also look further afield to encompass property, currency exposure, infrastructure and other specialist assets. These products have a significant presence in the broader multi-asset space. Nine of the biggest 10 funds in Morningstar’s Moderate Allocation categories, covering multi-asset products, have an onus on income. Some of these have taken significant amounts of money over recent years. One of the largest vehicles, Premier Multi-Asset Distribution, has racked up nearly £1bn of net inflows since the start of 2012, according to Morningstar data provided to Money Management.
Taking the multi-asset route rather than, for example, buying a bond or equity income fund, may seem like a no-brainer. However, choosing the right product is no easy task given that scores are already available and fund firms continue to flood the space with new offerings. Metrics such as performance and yield can give intermediaries a useful starting point in their research.
Table 1 shows those funds that have performed best in the past five years. Given no dedicated peer group exists for this cohort, the analysis has examined funds from the Investment Association’s Mixed Investment sectors, as well as its Flexible Investment, Targeted Absolute Return and Volatility Managed groups.
The analysis is limited to funds that generate a yield of 2.75 per cent or more by investing across a range of asset classes.
Closed-ended funds have also been included, with products from the Association of Investment Companies’ Flexible Investment sector forming part of the study.
The strongest returns over the past three and five years do, in fact, come from a closed-ended vehicle, Seneca’s Global Income & Growth Trust.