Q1. WHY WOULD A MULTI-ASSET INCOME STRATEGY¹ STILL HOLD?
 

The search for quality income is more challenging than ever. Aggressive global monetary easing has pushed rates way down in the traditional go-to sources of yield.

Multi-asset income strategies could give investors access to multiple and diversified income sources which are critical for identifying income opportunities efficiently. More recently, there were periods in which diversification did not function as it has traditionally. Having said that, we still believe in diversification and in multi-asset investing for opportunities to generate optimal risk-adjusted return².

Our strategy performed² well in 2009 following the Global Financial Crisis, driven by our ability to invest in pricing dislocations across asset classes including high yield (HY)³, non-agency residential mortgage-backed securities (RMBS), convertible bonds and other areas. The aggregated flexibility across geography, asset class and capital structure worked to our favour and we hope to be able to do the same in the wake of this crisis.

2. Past performance is not a reliable indicator of current and future results.

Q2. HOW IS YOUR MULTI-ASSET INCOME STRATEGY POSITIONED^1,4?
 

We entered 2020 with a more conservative risk exposure through reduced equity allocation as we are mindful of the potential headwinds that could emerge. We will remain defensive until there is greater clarity on the severity and duration of the pandemic.

Against this backdrop, we have further strengthened the resilience of our income portfolio in the first quarter, whereby we have:

• trimmed equity exposures⁴ globally, maintaining a preference for higher quality US equities, in light of the fiscal and monetary responses.
• added duration⁴ via US Treasury futures, in an effort to help curb the downside of stress in other credit and risk assets.
• increased cash levels⁴ to add ballast to the portfolio, ensure reserves for potential opportunities and accommodate redemptions in an orderly manner. We have had no issues meeting redemption requirements.
  
  

Q3. COMPANIES ARE ANNOUNCING DIVIDEND CUTS, HOW WILL THAT IMPACT YOUR STRATEGY^1,4?
 

That is definitely top of mind. In managing this strategy, our intent is to pay out from gross yield^5,6 and not capital – that continues to be the intent today. 

With that said, we have and will continue to see dividend cuts and suspensions in an array of regions and sectors. Most significantly in Europe, but also in emerging markets (EM) to some degree. That is why we continue to have a preference for defensive US equities where there is less expectation of dividend cuts. 

It is important to distinguish the reasons for those dividend cuts. Are they being encouraged by regulators or governments, such as the European Central Bank’s (ECB) guidance to European banks to cut dividends? Or are they prudent, proactive steps by companies to shore up short-term liquidity? 

Our focus at the strategy level is to buy high-quality companies with relatively attractive levels of yield - where these yields are sustainable, with the potential to grow over time. Most of the companies that we hold which have experienced cuts are expected to resume payouts in due course given their strong balance sheets and payouts. The overall viability of these companies remains our long-term focus. 

5. The manager seeks to achieve its stated objectives. There is no guarantee they will be met. Past payout yields and payments do not represent future payout yields and payments. Positive distribution yield does not imply positive return. Dividend rate is not guaranteed. Dividend yield is calculated based on the monthly dividend distribution with dividend reinvested, and may be higher or lower than the actual dividend yield. Distributions may be paid out of capital which represents a return or withdrawal of part of the amount an investor originally invested or from any capital gains attributable to that original investment. Any payments of distributions by the Fund may result in an immediate decrease in the net asset value per share.
6. Forecasts/ estimates may or may not come to pass.

Q4. HY CREDITS ARE TROUBLED BY THE PLUNGE IN OIL PRICES AND CONCERNS OVER DEFAULTS. WHAT IS YOUR EXPOSURE^1,3,4,6?
 

We have seen a massive oil sell-off leading to a price drop and that is an important part of the US HY market. Even prior to this, however, the HY exposure in our income portfolio was already defensively positioned. 

• Our overall HY exposure is at the lower end of the historical range for the portfolio in terms of the allocation to HY.
• Geographically, majority of our HY exposure is in the US, with some in Europe. We have diversified into European HY given its higher credit quality than US HY, contributing more conservative positioning. We also have minimal exposure to energy in European HY.
• From a sector perspective, we are overweight defensive areas such as telecommunications and healthcare and underweight energy and metals and mining. And even within energy, we are underweight more speculative companies. Those tilts have helped to protect the portfolio. We continue to reduce exposure to credit sectors directly impacted by the pandemic but that have rallied back from their March lows, such as travel and lodging.

We believe there is potential for total returns with spread compressions and attractive yield, further supported by accommodative Fed actions.

Q5. WHY DID YOU DIVERSIFY INTO IG CREDITS THIS YEAR^1,4?
 

We have built up our allocation from about 0% at the end of 2019. We find IG corporate relatively attractive because spreads have widened significantly since February, by about 100 basis points. These companies have strong balance sheets and are not experiencing fundamental concerns facing some sections of the HY market.

The ECB’s and the Fed’s asset purchase programmes are committed at buying IG corporates, that has been a game changer, providing support.

Our preference is for higher rated companies offering an attractive absolute level of yields with high quality. We are selective with our exposure to higher quality triple B and triple B+, complementing that with lower-grade single A. 

Q6. THERE WERE LIQUIDITY CHALLENGES IN SECURITISED ASSETS, WHAT IS YOUR OUTLOOK NOW^1,4,8?
 

We had a modest allocation to non-agency securitised assets predominantly in RMBS. That allocation was to gain exposure to a strong US consumer and a healthy US housing market and a diversifying holding to our other credit exposure tied to corporate balance sheets.

Historically, in turbulent markets, those assets have traded with little equity sensitivity given different drivers of return. Unfortunately, the combined impact of the pandemic pushing the economy into recession, severe liquidity challenges and the forced de-leveraging in the securitised market led to an indiscriminate sell-off. The higher-quality names were easier to sell as investors liquidated, and prices got to distressed levels very quickly. 

The fallout of the pandemic introduces fundamental concerns about the strength of the consumer and the housing market, including job losses and potential inability to make payments on houses and cars. However, we are not leaving the sector.

The significant monetary and fiscal stimulus support will bolster these sectors. Most of our exposure was in RMBS, where the Fed has stepped in to support the housing market. We also believe our higher quality basis is still valid, that the price declines were exaggerated by the liquidity panic.

Now at dislocated prices, we are actually starting to look for more opportunities in fundamentally stronger sectors. We are keeping our exposures but making some rotations.

Q7. IS THE REBOUND IN THE EQUITY MARKETS SO FAR SUSTAINABLE? ARE THERE SIGNALS TO ADD BACK RISK^1,6?
 

It’s really tough today to know exactly what markets are pricing-in as valuations are subject to earnings. Forward-looking earnings are uncertain for now as companies are withdrawing from providing guidance.

The gap between analyst estimates and reports is historically very wide, and so it is hard to get a handle on how attractively valued equities are currently. What gets realised will determine what’s attractive. Generally, the market is looking pass 1Q 2020 and 2Q 2020 corporate earnings, and is now looking into 2H 2020 and 1H 2021.

The rebound in equity markets from their lows have been extreme and very quick. At this point, equity markets will likely take a breather and be range-bound for now. US equities have recovered more than EM equities overall, but sectors such as US small-caps are still lagging. We would not say that US equities are undervalued, at this point.  

From an equities perspective, we have reduced risk and have since been sitting tight with our overall exposure. We are not yet comfortable taking on more equity risk. If we were to gain more confirmation of a successful restart of the global economy, we would feel more confident adding back risk in equities where we see attractive valuations. That could include areas in EM, particularly Asia, where recovery, in our view, is within sight.

Conclusion

Overall, we believe that multi-asset income strategies remain important as the search for quality income is now harder than ever. Aggressive global monetary easing has pushed rates way down in the traditional go-to sources of yield. Access to multiple and diversified income sources across geography, asset class and capital structure remains critical for identifying income opportunities efficiently. We still believe in diversification and in multi-asset investing for opportunities to generate optimal risk-adjusted return².

 

This represents investment team’s views as of 29 April 2020 based on current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment or research recommendation. 

Yield is not guaranteed. Positive yield does not imply positive return. Diversification does not guarantee investment return and does not eliminate the risk of loss.

1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstances and market conditions.
3. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
4. Holdings, exposures and allocations for actively managed portfolios are subject to change from time to time. These represents Multi-Asset Solutions investment team’s views under current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment advice. Diversification does not guarantee investment return and does not eliminate the risk of loss.
7. The index refers to ICE BofAML US High Yield Constrained Index. The index does not include fees or operating expenses and are not available for actual investment.
8. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include mortgage-backed securities (MBS) which are debt securities backed by mortgage-related financial assets. These assets include residential and commercial mortgage loans.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.