Investors trying to create a multi-asset income portfolio have faced a “desert” for much of the past decade, according to Fahad Kamal, chief investment officer at Kleinwort Hambros.
Kamal says record-low bond yields, combined with meagre yields offered by many of the top-performing equities of the past decade, has meant running a portfolio with income in mind was uniquely challenging, especially relative to previous decades.
He says: “Three years ago, if you wanted a yield of 4 per cent on something, you might have had to buy the bonds of the government of Madagascar. But it is better now.”
In terms of his equity exposure, he says: “The 60/40 equity-bond split is probably back. We are quite cautious on the outlook in general. But in our income portfolios we have been reducing our US exposure, and buying UK and European equities quite a lot.
"And that’s the key to outlook now: those markets both look reasonably priced and are also the markets that offer a decent yield. That means income investing is viable again.”
Preserving capital
One approach taken by some professional investors has been to take income from the capital gains made during a bull market.
However, Eugene Philalithis, multi-asset investor at Fidelity, says that while very high yields from equities have been hard to come by, he focuses on “preserving capital” and owning lower-yielding equities that can grow the income over time.
He says achieving 4 per cent income from an equity portfolio is now much easier than it has been for years, “but there is also much more volatility and uncertainty.”
David Coombs, head of multi-asset funds at Rathbones Unit Trust Managers, says he tried to thread the needle by, “buying stocks such as US technology businesses that were going up a lot, and then using the capital gains from those to buy bonds which have a yield.
"What has changed over the past year is that more equities pay a decent yield, so we don’t need to own as many of the growth-type equities”.
He says the principal way his income portfolios differed from the more balanced strategies he also runs is the income strategies tend to contain more bonds and fewer equities.
But he says changing demographics are also changing the long-term equity composition of a multi-asset equity portfolio.
Coombs says clients may in the past have expected to live for 10 years in retirement, so constructing a multi-asset portfolio meant focusing solely on income-generating assets to fund that lifestyle, but as clients live longer in retirement there becomes a need not merely to own income-paying assets, but also a slug of assets that can grow the overall size of the portfolio to deal with the additional years in which the portfolio will be active.
He says this may mean that over the longer-term, multi-asset income portfolios will also need to have some growth equities in order to increase the overall size of the pot.
