Income funds offer a pragmatic approach to portfolio construction in today’s environment given the aim to generate stable returns and navigate rollercoaster markets.
This outcome is increasingly appealing, according to a research note from Allianz Global Investors (AllianzGI), due to the swings in the US stock market so far this year, coupled with potentially inflationary economic policies from the Trump administration, in turn prompting the US Federal Reserve (Fed) to postpone interest rate cuts.
“For investors with a preference for more stable returns without big swings in price, or who are using their funds to support their present lifestyle, income funds may well be a good fit,” said the note.
“In today’s environment of volatile stock prices, ‘higher for longer’ interest rates, and an unpredictable US administration, they might be more relevant than ever.”
Three key features
AllianzGI believes income funds share certain characteristics that offer investors a more measured and steady approach.
Firstly, these funds may include allocations to bonds, especially those assets with relatively low interest-rate risk, such as short-duration bonds and floating-rate notes. This enables investors to benefit from the higher bond yields on offer to secure a better potential return as well as a cushion against any possible rise in rates.
Secondly, income funds are deliberately tilted towards assets with a more stable return profile, added AllianzGI. And where they invest in stocks, income funds tend to focus on companies that pay good dividends, which in practice means well-established and stable businesses with less volatile prices.
Thirdly, income funds may be structured to control volatility – such as via multi-asset funds that allocate to a range of assets like private equity, oil or gold, for example, which are less correlated to stock prices.
Steady and stable
The fact that income funds aim to provide regular income means they must be managed in a disciplined way.
“That is an attractive feature in a global economy where tariffs and trade wars threaten to upset economic flows, and where an enormous amount of investor capital is predicated on fast-moving and unpredictable technology,” said AllianzGI.
Further, alternative fixed income instruments such as floating-rate notes, short-duration high yield bonds and convertibles give income funds flexibility to adjust to market and economic cycles.
Bolstering the steady and reliable nature of income funds is their diversified approach across asset classes. “Getting the balance right between stocks and bonds is likely to be crucial to protect and build wealth in the coming years,” said AllianzGI.
“In an actively managed, multi asset income fund, the fund manager has the ability to adjust the balance between stocks and bonds in response to market conditions, helping to manage risk and provide more stable returns.”
