Becket (pictured), who runs the £20m Psigma Dynamic Multi Asset fund, says that traditional dividend-producing assets such as corporate and sovereign debt are no longer investable, given the poor yields on offer and growing interest-rate risk. However, Becket says that investors are just being lazy if they give up on finding income in the current market. He argues that he has found a number of niche alternatives to diversify his portfolio, such as short-duration funds, floating-rate note funds and catastrophe bond funds.
"To say that we now live in an income-less world is lazy – if you are willing to explore asset markets thoroughly and think outside the box, there are plenty of opportunities to exploit," he said.
"Indeed, some of the investment opportunities we currently use are actually very mainstream and don’t need a huge amount of specialist knowledge."
"However, through our investment process, we have also been able to uncover some interesting niche investments and create specific investment opportunities with an income bias for our clients," he added.
Becket says that one tactic he uses is holding short duration bond funds, which will not be affected when the interest rates do eventually rise.
"Many traditional corporate credit markets have become very unattractive, with yields at the lowest ever levels, as evidenced by the US High Yield Bond Index yield falling below 5 per cent in May for the first time in its history," he said.
"Such investments now present very high interest rate risk. In short, they will suffer when interest rates finally start to rise, impacting capital values."
"We have tried to shield our clients’ assets from the threat of rising rates by only owning short-duration assets, where we can achieve yields of 4 to 5 per cent with little interest-rate risk, because the bonds mature in under three years," he added.
Becket holds the AXA US Short Duration High Yield Bond fund in his portfolio. It is his fourth-largest holding, making up 6.2 per cent of AUM. He also holds the TwentyFour Focus bond fund.
"By being nimble and creating our own mandates with external managers, we have been able to craft attractive opportunities for our clients," he said. "One such investment is the TwentyFour Focus Bond fund, which we structured in early 2012."
"The unique nature of this fund is that all of the bonds that the fund invests in will redeem within three to four years."
"This 'finite' life of the fund does, we believe, considerably reduce duration risk and offers a reasonable degree of protection against the possibility of rising interest rates, whilst providing an income stream of 7 per cent per annum," he added.
TwentyFour Focus Bond was launched into the IMA Sterling Strategic Bond sector in February 2012.
The fund has returned 14.06 per cent since then while the sector is up 9.95 per cent. It has also beaten its benchmark – the Libor GBP 3m Index – which has returned 0.89 per cent over the same period.
Performance of fund vs sector and index since Feb 2012
Source: FE Analytics
Becket also uses floating rate portfolios such as Neuberger Berman Floating Rate Investment Trust and TwentyFour Asset Backed Income to protect his fund against an eventual hike in interest rates.
He commented: "We have also been able to find other bond investments where the risk of rising rates is mitigated through coupons that are ‘floating rate’."
"Key holdings within our portfolios include the Neuberger Berman Floating Rate Investment Trust, which has a yield of 5.5 per cent. The income is linked to interest rates, which will also go up when rates eventually rise."
"A similar investment would be the TwentyFour Asset Backed Income fund, which invests in very high-quality European asset-backed securities and pays an income in excess of 8 per cent, again with floating rate coupons."
Becket points to reinsurance bonds – or catastrophe bonds – as an even more specialised area.
"These effectively lend money to insurance companies insuring against extreme natural catastrophes," he said.
"These bonds are typically only triggered against 1 in 100-year type events and it is still possible to buy a diversified portfolio, such as the GAM FCM Cat Bond fund, with a yield of 8 per cent," he added.
Despite the various niche income-producing funds within his portfolio, Becket says he hasn’t given up on equity income vehicles, though he says that the defensive equities the majority of managers hold are now past their best.
"Over the last few months, there has been a belated return of positive sentiment towards equities, as investors have warmed to the concept of dividend yields, with some money flowing out of cash and into shares seeking a yield," he said.
"This has led to a rare phenomenon of 'boring but worthy' sectors such as utilities, healthcare and consumer staples leading the market higher in the recent rally."
"We have had a high weighting to such investments over the last few years through our 'defensive delights' theme, but we believe that now is the time to start reducing expensive investments such as these and to focus on better value, long-term opportunities."
"We don’t believe that defensive equities will necessarily be bad performers in the years ahead, but we believe that their best days are behind them," he added.
Because of that, Becket says he has turned to the £260m Lazard Global Equity Income fund so that he is not exposed to such companies.
Lazard Global Equity Income has a globally diverse portfolio, with high weightings to continental Europe, North America and emerging Asia.
Over five years the fund has returned 48.74 per cent, beating the IMA Global Equity Income sector and the MSCI AC World Index, which are up 42.89 per cent and 36.35 per cent, respectively.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Lazard Global Equity Income has a headline yield of 3.7 per cent. Its minimum investment is £2,000 and it has an ongoing charges figure (OCF) of 1.56 per cent.
Becket has managed the Psigma Dynamic Multi Asset fund since its launch in September 2008. Over that time it has returned 39.04 per cent, beating the IMA Mixed Investment 40%-85% Shares sector by roughly 5 percentage points.
It has an OCF of 2.53 per cent and requires a minimum investment of £10,000.
