Slim pickings and the great skew
The Global Financial Crisis of 2008 ushered in a new era of low interest rates and higher asset prices as central banks and governments introduced measures to restore economic growth.
For income investors, however, ultra-low interest rates and high asset prices have been less of a blessing. With bond yields at extremely low levels and equities becoming increasingly expensive, income investors have struggled to generate yields that match their spending requirements.
In a bid to secure the levels of income that they require, investors have been forced to move up the risk spectrum, for example by investing in lower quality credits that carry a higher risk of default and focusing on a relatively narrow range of dividend-paying equities.
The upshot of this is that many income portfolios have become skewed towards higher risk investments, making their investments more volatile and making them vulnerable to large drawdowns in periods of market selloffs. For income investors, many of whom are retired or are otherwise no longer in the accumulation phase of their lives, such drawdowns may be particularly difficult to manage.
This is not simply because it may take months or even years for a portfolio to recover ground lost in a major market drawdown. Significant economic dislocations dampen corporate profitability, which frequently lead to dividend cuts – as happened in 2020, when around half of the companies in the FTSE 100 cut or cancelled their dividends.[1]
In such circumstances, income investors may be forced to dip into their capital to provide the income they need at the very moment when their investments have materially shrunken in size. Needless to say, raiding capital to pay income at such a time will prolong portfolio recovery times.
Go global for smoother income returns
Our experience shows that a less volatile solution is possible - namely through applying a well-balanced multi-asset approach to the task of generating regular income. By widening the opportunity set to include global markets and a wider range of asset classes, we are much more likely to find robust income streams from a range of assets and markets.
Furthermore, by bringing together in one portfolio a range of assets that have very different characteristics, we are able to manage overall risk by reducing correlations between portfolio holdings. While it must be acknowledged that correlations may converge temporarily during times of market stress, multi-asset investors derive significant benefits from holding a range of markedly different investments, each of which can step up to play its role as market conditions change.
This global, multi-asset thinking is the driving force behind the LF Canlife Diversified Monthly Income Fund, which pays a monthly dividend to its investors from income generated by the portfolio (never from capital).
To tap into highly diversified income sources the fund invests in global equities, global bonds (both investment grade and high yield) and real assets such as property and infrastructure. Unusually among income funds, the portfolio also features a high conviction basket of growth companies, including some well-known tech names. Which brings us to the subject of why income investors need to roll with the times.
Important Information
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
The LF Canlife Diversified Monthly Income Fund (the Fund) may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the Fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management.
This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
CLI02005 Expiry on 16/12/2022
[1] AJ Bell, Dividend Dashboard, Q2 2020