Schroders’ Multi-Asset Investments and Global Strategic Solutions teams look at how investors can obtain sustainable income in the low economic growth, low interest rate environment that is expected to persist for years to come –
Current economic backdrop:
• Economic growth is likely to be low in the coming years as a consequence of the excessive borrowing accumulated since the 1990s.
• The weak economic backdrop suggests that in the future investors will be less able to rely on capital growth and that exposure to growth assets may come with an even greater level of downside risk.
Effect of reduced yields:
• A traditional way to earn income has been to hold government bonds or money market instruments. However, in this economic environment these assets are unlikely to provide the answer since in many developed economies they no longer offer a yield sufficiently high enough to satisfy investors’ objectives either in absolute or real terms.
• We anticipate that the pressure on public finances will prevent governments from meeting all of their pension promises and that the responsibility for generating investment income will increasingly fall on individuals.
• A ‘European Wealth’ study by Schroders shows that reduced yields have put significant pressure on savers and retirees who often rely on their investment income to support their standard of living.
• In European countries, the average gap between desired and likely retirement income was more than 30% of their current household income.
• The income gap is not just a problem for pensioners. For example, an investor in a 90 day Euro term deposit needs almost three times more capital in 2012 than he did in 2008 to generate the same level of income.
Historic approaches to income investing:
• The ‘standard’ approach to income investing has been to focus on a single asset class to provide income.
• However, due to the fragile economic background a single asset class approach is likely to suffer from a higher level of systematic risk, which given current yields, is largely uncompensated.
• Investors can no longer rely on consistent capital growth and on traditional ways to generate income without being exposed to risks of low quality or low liquidity.
• Therefore the search for income is likely to remain an attractive theme for investors. However, with yields so low around the world, investors need to be free to maximise their range of opportunities and diversify their sources of income.
Taking a global multi asset approach:
• Taking the above into account, a global multi-asset approach that seeks out sustainable income from a range of asset classes can provide an income solution even in this low rate environment.
• Multi-Asset income investing is possible thanks to the availability of a wide range of income-generating asset classes. These different asset classes can be combined to provide different yield and risk profiles.
• A multi asset approach delivers an improved risk/return trade off in comparison to holding each asset class on its own.
Managing downside risk:
• An important consideration for an ‘income investor’ is the potential for drawdown or loss of capital.
• A multi asset approach to income generation benefits from diversification and offers a more robust portfolio in an environment that needs to consider not only income and its sustainability but also the risk of large drawdowns.
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