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With lower interest rates, investors are increasingly exploring other sources of income for their investment portfolios, in addition to cash savings or government bonds. Based on their investment objectives and risk appetite, investors looking for income could consider flexible strategies that can invest across asset classes for potential opportunities, without overstretching for yield.
We share the A.B.C. for multi-asset income investing:
Adopting dynamic asset allocation1 could help investors explore potential opportunities in a volatile market.
As the global economy is losing momentum, our Multi-Asset Solutions (MAS) team holds an overall cautious allocation to global equities, while relatively prefers US equities over those in other regions on higher-quality US corporate earnings growth prospect. By comparison, there is less confidence in the outlook for European equities and emerging market (EM) equities.
In the fixed income space, it’s important to focus on quality while seeking yield in an uncertain market. When potential opportunities arise, and depending on investors’ risk appetite, one may consider to add high-yield (HY) credit3 selectively with a quality bias. For example, high revenue growth over the past few years has enabled US HY credit issuers to reduce their borrowing meaningfully, strengthening their balance sheets.
From asset allocation perspective, including liquid assets in a portfolio may help build resilience in times of uncertainty. Allocating to short-dated fixed income such as money market instruments and government bonds could provide cushion to an income portfolio while not foregoing the search for yield4.
Investors may also want to diversify2 their sources of income. As the chart shows, there are varying yields among the different asset classes.
Sources of income5
Investors could also expand their income sources within a single asset class1. Fixed income, for example, is a broad spectrum that includes sectors such as securitised debt6. All fixed income sectors and countries have different correlations to US Treasuries.
Investing dynamically in multiple fixed income sectors allows a wider source of income opportunities which are less likely to be impacted by a single risk factor. This could create income from a more balanced combination of sectors and help diversify2 portfolio risks.
Some of the asset classes have low or even negative correlation to one another, so they could complement each other in terms of risk. Within fixed income, asset-backed securities (ABS) 6 and mortgage-backed securities (MBS)6 are two common types of securitised debt that tend to have defensive characteristics and low correlation to equities.
Currently, US consumption and consumer finance remain healthy, as the chart shows. These attributes are supportive of ABS and MBS.
Net worth of US households7
Based on investor’s investment objectives and risk appetite, agency MBS could be considered as another option to US Treasuries in asset allocation. They are issued or guaranteed by US government-related bodies, including Ginnie Mae (a government entity within the US Department of Housing and Urban Development), as well as Fannie Mae and Freddie Mac (which are both government-sponsored enterprises). Agency MBS demonstrates defensive characteristics just like US Treasuries, but may suffer from refinancing as rates fall, so professional advice on security selection is crucial.
By considering the A.B.C. in a multi-asset income strategy, investors could add resilience to a portfolio, while aiming for consistent income. Such strategy could help investors ride through the increasingly challenging investment environment.
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