Multi-asset income funds need to look beyond traditional income securities such as government bonds, investment-grade bonds and blue-chip dividend payers, according to financial professionals, who argue that these are no longer sufficient to produce a decent yield. 
While many believe that global growth is set to remain strong throughout the second half of this year, there are concerns that low yields across the board will continue to pose a challenge for those seeking income.
Toby Hayes, vice president and portfolio manager at Franklin Templeton Solutions, says that maintaining a defensive multi-asset fund with less volatile assets while seeking decent yield is now virtually impossible.
“In the current environment, we don’t think you can provide this ‘defensive income’ in a traditional multi-asset class portfolio,” he said.
“With government bond yields at rock-bottom levels, in order to achieve a potential goal of a 4 per cent to 5 per cent income target, a manager taking a traditional approach may consider looking to increase his or her weighting to high-yield emerging market debt and/or high-dividend equities. These assets – while ostensibly ‘growth’ in nature – are also seen as more risky because of the potential volatility and they tend not to retain value in the event of a market correction.”
“In today’s environment, I believe the concept of having a low-risk, high-income portfolio through traditional asset allocation is nonsense. You may achieve a ‘low-risk’ portfolio in the sense that it is designed to be low volatility, but it is likely to consist mainly of government bonds that are currently yielding next to nothing. Therefore, a different approach is required, we believe.”
This sentiment is shared by Eugene Philalithis, portfolio manager of the Fidelity Multi-Asset Income fund, who believes that a combination of global headwinds means that income investors need to tread carefully.
For instance, he says the biggest concern for the US is any potential ‘stagflation’, which could happen if inflation rises as a result of Fed rate hikes but growth fails to pick up.
He also expects the dollar to remain strong, impacting funds with global exposure, and is keeping a close eye on geo-political risk factors such as the Russia-Ukraine conflict and Greece’s debt negotiations.
As such, he expects certain asset classes to perform better than others, and has devised the following table predicting how well each will do:
Predicted performance of asset classes for income investors this year
Source: Fidelity Worldwide Investment
Philalithis said: “While [traditional income] assets can be useful in offering an element of protection against downside risk in a multi-asset income portfolio, we believe they are unattractive for income-seeking investors at the moment.”
One of the asset classes the manager has tipped to deliver a positive level of income this year is infrastructure, which many individuals choose to invest in for its defensive characteristics and lower volatility.
A fund with a strong track record in this areas is the First State Global Listed Infrastructure fund which, according to FE Analytics, has a top-decile annualised volatility of 9.11 per cent over five years, compared to its average peer in the IA Global sector with 11.06 per cent.
The five FE Crown-rated fund has a top-decile Sharpe ratio, which measures risk-adjusted performance, of 0.91 and a top-decile maximum drawdown, which shows how much an investor would have lost if they bought and sold at the worst possible times, of 7.19 per.
Managed by FE Alpha Manager duo Peter Meany and Andrew Greenup, the £1.3bn fund has also outperformed its average peer over five years by 15.43 percentage points, delivering a total return of 73.67 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The research team at Square Mile, which has awarded First State Global Listed Infrastructure an ‘AA’ rating, said: “This is an interesting fund for a number of reasons. It offers access to a different asset class and can meet the needs of a range of investors.”
“Its objectives are clearly articulated and to date have been achieved. It is managed by an experienced, focused and driven investment team, still in the early stages of building its franchise.”
The fund has a clean ongoing charges figure (OCF) of 0.89 per cent and yields 2.57 per cent.
Another investment style that both Hayes and Philalithis are tipping to do well this year is growth. Although these companies may pay lower dividends, investors can create income by taking profits from their capital gains.
For those trying to avoid the traditional income assets, there are numerous funds in the IA UK All Companies sector which have a mandate to invest in more growth-orientated parts of the market.
Highly regarded examples, according to FE Analytics, are recovery funds such as Liontrust Special Situations, funds that hunt further down the cap spectrum such as F&C UK Mid Cap and Neptune UK Mid Cap, and value funds such as Miton UK Value Opportunities, all of which can be found in the sector.
However, Stephen Thornber of Columbia Threadneedle Investments and fund manager of the St. James’s Place Strategic Managed fund, says there are also plenty of opportunities for income investors on a global scale. He does warn though that these opportunities lie in equities as opposed to other asset classes.
“In the US, pay-outs from S&P 500 companies reached $93bn in the fourth quarter of 2014; and this figure was eclipsed in the first three months of this year, which saw some $99.4bn paid out in dividends,” he said.
“This trend looks set to continue with expectations that global dividends will continue to grow in 2015. Although a stronger dollar is likely to be a challenge for some US multinationals, it is expected that shareholder-friendly activity will continue.”
He adds that the global dividend story is not just about the UK and the US, and that the shift in Japanese corporate behaviour has also led to companies raising their dividend payments.
“In an environment where some of the traditional asset classes favoured by income investors are looking less attractive – in historic terms – equities represent the best value and should continue to offer an attractive and growing income when compared to bonds, even if bond yields start to rise,” he advised.