Eric Bernbaum, who runs the JPMorgan Multi-Asset Income fund, says: “Despite 2022 providing a painful reset for markets, this has undoubtedly created value for multi-asset investors.
"The tremendous repricing of fixed income markets during 2022 has two important consequences for multi-asset income investors.
"Firstly, it brings back the potential for portfolio diversification that was missed last year. With higher yield levels on offer, a drop of 100 [basis points] on the 10-year US Treasury yield would result in a total return of 12 per cent.
"This means bonds can potentially provide more buffer in a market correction or an economic downturn.
"Secondly, income is back in fixed income. After a decade and a half, core bonds are back on par with equities, offering yields that are comparable or higher than stocks.
"At over 5 per cent, corporate bond yields exceed the earnings yield of equities while extended fixed income markets such as US high yield offer all in yields well above those of stocks.”
Bonds being relevant again for income investors is also on the mind of Fahad Hassan, chief investment officer at Albemarle Street Partners.
He says: “Asset allocation in income portfolios can rely more heavily on fixed income assets in 2023. A declining inflation and yield backdrop helps limit the volatility of owning fixed income assets, at a time when yields are higher than average.
"These holdings should also provide greater stability to portfolios if economic growth weakens more than expected. We favour high-quality government and corporate bonds but see value in high-yield debt as well.”
Coombs says he is also not keen on owning cash in portfolios right now as an asset allocation decision, as he says that in the current inflationary climate, holding cash as the result of an asset allocation decision is highly risky.
Walsh says another option for investors seeking to have an income portfolio that does not sacrifice too much growth is to buy some growth assets and “sell” some of the upside. This is known as 'sell options'.
Essentially, investors receive a payment now, which they can use to fund income payments to clients, in exchange for which a certain proportion of the future capital gain of the equity goes to the person who made the payment.
James Klempster, multi-asset investor at Liontrust, says that while there is much focus on being geographically diversified, “in reality, this is the same as being exposed to different investment styles, and that is what matters”.
David.Thorpe@ft.com
