Preview:
It is tempting to view income investing as inextricably linked to the risk-free rate, but delving deeper into the broad asset classes of fixed income and equities reveals a varied range of yield-bearing assets. With careful management, these securities have the potential to provide a consistent, reliable stream of income across all market conditions.
US Treasuries might be the first holding that comes to mind when thinking about fixed income, but there is a whole universe of assets of different qualities and maturities within that space, each with unique characteristics that suit different market conditions. Investing sensibly across this spectrum can offer real benefits to investors who prioritize income. In fact, even the way a portfolio’s allocation to US Treasuries is structured can be important to income and capital appreciation goals, dependent on changes to the yield curve.
Broadly speaking, government bonds offer the easiest access to risk-free yield in an environment of higher interest rates, but we believe understanding the way other fixed income assets behave is paramount to achieving the best risk-adjusted returns available. Initially, this would involve looking across the entire yield curve to assess the correct blend of duration for a particular fixed income portfolio. Investing solely in short-dated instruments means an inability to lock in attractive yields, creating the possibility of much lower yields as those investments mature. A shorter-duration profile also reduces the effectiveness of fixed income investments as a hedge against equity drawdowns. Secondly, incorporating other fixed income securities, such as corporate bonds, offers the prospect of more attractive yields to complement those investments carrying low or no risk. In the current environment, yields of between 5% and 6% can be generated from good quality investment-grade bonds, while yields closer to 9% are available from high-yield issues. Blending these higher-yielding assets into a portfolio can provide a significant boost to total returns at acceptable risk levels, in our view.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. There is no assurance any forecast, projection or estimate will be realized.
Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
Investments in equity-linked notes (ELNs) often have risks similar to their underlying securities, which could include management, market, and, as applicable, foreign securities and currency risks. In addition, ELNs are subject to certain debt securities risks, such as interest rate and credit risks, as well as counterparty and liquidity risk. Investments in equity index-linked notes (ILNs) often have risks similar to securities in the underlying index, which could include management risk, market risk and, as applicable, foreign securities and currency risks.