Portfolio Manager Thomas Kruse examines the findings from Pioneer Investments’ survey on income investing and outlines ways of achieving a target income.
Income shortage will be the biggest challenge facing investors over the next 20 years, says Thomas Kruse, Head of Risk Overlay and Income Strategies, Pioneer Investments. Funds Europe surveyed* 58 readers to find out what trends are driving the demand for income higher and whether investors are looking beyond traditional allocations to find new sources of sustainable income.
The results show that the two greatest drivers pushing the demand for income higher are insufficient savings and demographics (41%) and low yields on investment grade bonds (33%). Ageing populations and insufficient pensions are clearly a concern for savers and will continue to be so. But it is the latter trend that may prove to be more influential in driving the need for income, says Kruse.
“Bonds have been seen as a safe haven for so long but many are now losing their status. Bond valuations are at risk due to potentially higher interest rates. Although yields have increased, trillions of developed market government bonds are still in negative yield territory. So not only do traditional fixed income assets have low income prospects, they may now actually be more risky than other asset classes.”
The survey showed that income investors have looked mostly to equities (50%) as a way to compensate for the absence of attractive yields, followed by higher risk fixed income (24%) and absolute return strategies (19%).
It seems few investors or managers are prepared to reduce their return expectations. Alternatively, says Kruse, investors have been forced to widen their investment scope and accept more risk in order to target the same level of income.
Investors have also looked beyond traditional single asset class allocations and considered a multi-asset class approach to income investing, favoured by 55% of respondents. “One way to tackle the income target is to diversify more,” says Kruse. “So there could be an outflow from pure asset class funds to more flexible multi-asset funds.”
Diversification is reflected in the survey’s responses as to what features of an income-oriented strategy would most appeal to investors. 36% cited yields from equity dividends, 30% favoured yields from Real Assets, 24% looked to investing in flexible and unconstrained Fixed Income, while equity income enhancement through derivative overlays appealed to 10% of those surveyed.
The primary objective for an income fund should be to distribute an annual income to clients and to reach its income target while incurring the minimum amount of risk, says Kruse. Given the pick-up of credit and liquidity risks in fixed income sectors, it should follow an unconstrained, flexible approach.
A good income fund should also seek stocks with high cash flows in order to sustain high dividend payouts. It could also look to enhance the equity income through the use of derivative overlays, that is selling options to generate premiums. Furthermore, it could use real assets to manage the impact on capital from possible rises in inflation.
Disclaimer: Unless otherwise stated all information and views expressed are those of Pioneer Investments as at 28 April 2017. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority (“FCA”) are available from us on request. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
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