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24 October 2019

Income Opportunities—Still There, If You Know Where to Look

By Robert O. Abad

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With more bonds drifting into negative yield territory, are income-generating opportunities going the way of the dinosaur? Our answer is a resounding “no.” You can still find attractive income and return opportunities across publicly traded credit markets such as investment-grade and high-yield corporate credit, bank loans, emerging markets debt and structured credit. If you’re willing and able to assume greater risk, even higher yields may be found in alternative markets such as private debt, real estate, hedge funds, etc.

However, reaching for yield can be a risky and short-sighted proposition. Indeed, many of our clients are wary about loss of capital, see-sawing returns and the ability to quickly redeem their money, which isn’t at all surprising. Financial markets have been roiled this year by a number of market-moving events: global trade tensions, Fed policy uncertainty, China slowdown fears, Brexit and, more recently, new risks with unknown ramifications such as the Hong Kong protests and Saudi oil facility attacks.

If you have a long-term investment horizon and are looking to generate income, our biggest piece of advice is to avoid the siren song of esoteric asset classes, highly concentrated strategies or any strategy that would only work in a single macro scenario. These could potentially expose you to more drawdown, volatility and liquidity risk. Instead, consider fixed-income solutions that have the ability to evolve with market trends, are more diversified and defensive-minded, and have greater investment flexibility to exploit income opportunities as they appear.

Back in 2010, we unveiled an income-focused strategy called Multi-Asset Credit (MAC). Its product design addresses many of the shortcomings of other multi-sector bond strategies that floundered in the aftermath of the global financial crisis. These questionable issues included insufficient diversification, inadequate risk controls and the use of exotic currencies and derivatives to amplify returns. Our investment team’s mission was clear: focus on cash bonds to generate income, offer daily liquidity for our clients and place the same kind of emphasis on the downside (risk aversion) as you would on the upside (reach for yield).

Demand for MAC has been strong since inception and we believe will remain so for the foreseeable future. The strategy has drawn the attention of clients and prospects looking for an income solution, but it has also morphed into an asset allocation solution for those looking to consolidate portfolios. This makes perfect sense to us. The global bond market has grown by leaps and bounds over the past 20 years. With more choices available, it’s been getting harder for many investors to know what to buy, when to buy and when to rotate out of one sector and into another.

Looking ahead, we see demand for income solutions such as MAC growing in line with the global demand for income. First, we’re in the midst of a big demographic shift across the globe as populations are aging due to medical advances that continue to extend life expectancy rates. This will likely have profound, long-term implications on how individuals, businesses and governments think about savings and investment.

Second, other secular forces such as the impact of rising debt levels on global growth and advances in technology and innovation will likely have a depressive effect on the long-term trajectory of interest rates. Low rates have already left those on the verge of retirement playing catch-up with their savings, while pensions and insurance companies are challenged with identifying more attractive sources of income-generating assets to meet their future cash flow needs.

Despite all the noise about bonds going down the path of negative yields, there’s still a giant universe of securities out there that offer attractive income-generating opportunities. If you need help sifting through the options, we encourage you to explore the opportunity MAC offers. For an at-a-glance compilation of our relative value assessments by region and sector, please review our latest Global Outlook.

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