A fixed income strategy provides income via regular coupon payments from bonds. The total return to investors is an amalgam of these regular payments plus any appreciation or depreciation in the price of the bond over the period it is held. The risk/return profile of bonds is typically dependent on two factors:
- Credit quality, which is a reflection of the financial strength of the issuer and,
- Duration, or the sensitivity of the bond to a change in interest rates. Bond prices tend to have an inverse relationship with interest rates, falling when rates rise and rising when rates fall.
Although interest rates have begun to rise, they are still at relatively low levels compared with the historical average. An active approach to fixed income investing can help identify the best opportunities across the credit spectrum, capturing potential in a changing and challenging environment while managing duration and sector exposures with a view to minimising risk.
A multi-asset strategy aims to source income from a variety of different asset classes – it’s the classic “don’t put all your eggs in one basket” approach. Multi-asset income strategies can vary – some have static allocations to particular asset classes whereas some are flexible (able to dial exposures up and down within asset classes and across geographies). A fund investor who intends to opt for the latter can consider leaving it to a professional fund manager to carefully weigh up risks and returns across different markets and tilt portfolio weights accordingly.
An equity income strategy combines the potential for capital growth (from the share price of the companies invested in) with the income from dividend payouts. Income can be taken regularly (to pay household bills or top up a pension allowance) or reinvested. The compounding effect of reinvested dividends can be a key driver of total returns in the longer term. Regular dividend payments (while not guaranteed) are likely to help cushion returns through periods of market volatility.
In general, reinvestment of income distributions can help to boost total returns over time through the power of compounding. Equity income strategies usually target companies that pay relatively high and sustainable dividends.