The trend has seen some turn to so-called 'bond proxies', which has forced valuations higher in some parts of the stock market.
Others have turned to alternative assets. Despite the perceived risk of some forms of alternative assets, the yields and returns have been quite compelling.
Indeed, a survey by BNY Mellon/FT Remark of 400 large institutional investors found alternative investments had generated strong returns over a 12-month period, with most saying they had met or exceeded expectations.
Below several managers across BNY Mellon’s brands explain their favourite alternative asset classes for income.
Suzanne Hutchins, portfolio manager on the Newton Real Return fund, said: “In the alternative universe, infrastructure and renewable energy assets probably have the best prospect of producing a smooth return over a 12-month period in our view.”
Sentiment around infrastructure has been boosted since the election of Donald Trump as US president, as he had previously signalled support for greater spending on domestic projects.
She added: “However, investment in infrastructure has not always been about riding a politically-induced construction wave, nor should it be reduced to that now.
“We also like listed infrastructure vehicles that invest in pre-constructed, government-backed, availability-based projects such as prisons and hospitals.”
The average UK-listed infrastructure fund in the IT Infrastructure sector has risen by 68.92 per cent over the past five years.
Performance of IT Infrastructure over 5yrs
Source: FE Analytics
The trusts have also delivered strong single-digit yields with the average IT Infrastructure sector fund yielding 6.6 per cent last year. It should be noted that the Foresight VCT Infrastructure fund delivered a yield of 19.3 per cent last year following several disposals ahead of a planned exit of the fund.
Philip Shucksmith, portfolio manager on the £10.5bn Newton Real Return fund, said: “We like some listed infrastructure companies because we are sceptical about the global growth outlook and the sustainability of many market valuations.
“A cyclical company that benefits from the optimism surrounding GDP projections would not be a particularly good diversifier if those projections prove unfounded.
“Whereas we wold expect availability-base infrastructure owners to be largely agnostic of where we are in the growth cycle.”
Renewable energy was also highlighted by the survey for its stable long-term cash flows, inflation linkage and low economic sensitivity.
Paul Flood, who manages the Newton Multi-Asset Diversified Return and Newton Multi-Asset Income funds, said: “If you are looking to invest for the long term you have to protect your assets against the potential ravages of inflation.
“Alternatives such as infrastructure and renewables have performed particularly well in recent months and can offer sustainable characteristics, a stable business model as well as good portfolio diversification benefits.
“Sustainability of income, the ability to grow capital and liquidity considerations are key in the current market.”
Flood said more conventional assets such as equities and corporate bonds, including high yield and emerging market debt, were more sensitive to the economic backdrop.
The multi-asset income manager said renewable energy was a sector that tends to get overlooked, despite being less affected by quantitative easing and zero interest rate policies “compared to other financial assets”.
“As long as the sun comes up every day, you’re going to sell power for something,” he explained.
Flood said UK assets had a sensible investor base that understands the asset class and have lower leverage.
Over the past three years the average listed renewable energy fund has risen by 29.67 per cent, according to data from FE Analytics.
Performance of IT Infrastructure – Renewable Energy over 3yrs
Source: FE Analytics
The highest yielding trust in the sector last year was the Renewables Infrastructure Group, which delivered a historic yield of 7.41 per cent. The £1bn closed-end fund rose by 6.97 per cent last year ahead of the average sector trust’s 4.25 per cent return.
The trust is a top holding in both Flood’s funds alongside John Laing Environmental Assets Group and Greencoat UK Wind trusts.
The average historic yield in the six-strong sector last year was 6.29 per cent, according to FE Analytics, down slightly from 6.56 per cent in 2015.
He added: “Renewables also fit in with decarbonisation and ambitions for a two degrees Centigrade threshold that scientists regard as the limit of safety before the effects of climate change become irreversible.”
Despite many investors considering fixed income assets overvalued in the current environment, there are some debt instruments that continue to offer attractive yields for investors.
Paul Hatfield, global chief investment officer at BNY Mellon subsidiary Alcentra, said: “The loans sector has attracted many new professional investors over the last 18 months, thanks to relatively high returns of around 4-5 per cent both in the European and US market with low volatility and low correlation to other asset classes.
“Sectoral default risk remains low outside of retail credits and the current interest rate environment is particularly favourable to investors in syndicated loans, which offer floating rate returns.”
As well as loans, Ulrich Gerhard, senior portfolio manager on the short-dated high yield bond strategy at Insight Investment, said the outlook for sub-investment grade credit also appears to be broadly positive.
“Default rates remain low and economic data is encouraging,” he explained. “In the US, uncertainty over how many interest rate hikes are to come is leading companies to refinance and issue debt at an accelerating rate.
“These trends have opened up some opportunities for short-dated high yield investors, especially after a period in which it has been difficult to find investments at reasonable levels.”