1st April 2011

JP Morgan: A whole new world for income investing

Olivia Mayell, Client Portfolio Manager, Global Multi-Asset Group,  examines the case for a global diversified income approach.

The quest for income is becoming more important. While investors could historically rely on savings accounts or bonds to meet their income needs, these options are not so practical for the foreseeable future. Therefore, it is fortuitous for investors that globally diverse income funds have risen to fill that gap. 

With traditional income sources expected to remain constrained for the foreseeable future, it’s more important than ever for income seekers to take a proactive approach.

And it’s likely that investors will have to look further afield – forgoing the muted returns of bank deposits and government bonds – and explore different ways to meet their income needs.

British income seekers increasingly realise that UK equity income and corporate bonds are no longer their only options.

However, sourcing diverse income opportunities can be difficult. People are growing increasingly comfortable with investing globally, but emerging markets debt, REITS, and high yield bonds are not usually areas where IFAs can make individual allocations to – hence the appeal of multi asset funds that can manage this capability for you.

A simple aim: to get the best income

The market for such funds is already very large in the US. They have grown based on a clear proposition: to try and maximise the income they produce. By aiming for an outcome that is yield-based rather than benchmark or asset based, the underlying asset allocation decisions are driven by simply what will achieve the best income.

With the diverse asset allocation that’s required, it’s likely that only asset managers with considerable scale and expertise across asset classes can deliver a multi asset income fund that meets the needs of modern investors.

The nature of these kinds of portfolios and the breadth of the investment universe means you need experts to guide you towards opportunities that look the most appealing. Therefore, having specific asset class teams that can share ideas and a fund management team that can make tactical asset allocation decisions is vital.

A broader range of income producing assets needs specialised expertise. Some of the areas in which these funds typically invest include emerging market debt and convertible bonds, not avenues you may want to attempt to explore without the necessary resources and skills.

A smart income choice in uncertain times

The merits of multi asset income investing with a global scope makes sense when markets are more benign, but when markets and events are uncertain, there is a particularly strong case to have the flexibility to move from asset class to asset class, or from region to region as the outlook changes.

There is a widespread belief that the number of people concerned about achieving a reasonable level of income to finance the lifestyle they have, or would like, can only grow. Yet when they look at what they can get from a bank or in the lowest-risk answers that have always worked before, they will have to extend themselves into other markets.

Income seekers need more diversified answers and they should feel more comfortable with a balanced blend of assets that produce an attractive level of yield versus equities and even more so, against bonds.

What is pivotal for asset managers is to help IFAs educate their clients on the merits of a globally diversified income portfolio – and show that to reach a certain level of income, they’ll need to take cash out of the bank and find smarter ways to invest. 

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