For investors today, finding yield is relatively straightforward. Deciding whether portfolios are being adequately paid for the risk, and knowing when to move elsewhere, is much harder.

While some assets across bonds, equities and alternative strategies still offer compelling headline yields, many of those yields now sit alongside full valuations or inadequate compensation for risk. The critical shift over the past 12-24 months has been the compression of risk premia: high-yield spreads are around historical lows, while global equity valuations remain stretched.

This places greater importance on dynamic allocation but also on asset valuations. Whereas a conventional multi-asset income portfolio may hold broadly stable allocations to dividend-paying equities, government bonds and corporate credit, an unconstrained strategy can take a different approach, moving more decisively between income engines as valuations, correlations and market risks change.

That distinction matters when yesterday’s most productive source of yield becomes tomorrow’s uncompensated risk.

When high yield isn’t enough

High yield (HY) bonds are a case in point to illustrate how dramatically an opportunity can change. In 2020, for example, HY represented approximately 25% of the portfolio (when HY spreads were 950 basis points as of August 31st 2020¹). By 2026, that allocation had fallen to around 1% (when HY spreads are at 263 basis points as of August 31st 2026²).

The reduction was not driven by an expectation of an immediate crisis. It reflects the narrowing reward for accepting credit risk.

Put simply, spreads no longer compensated investors for the associated risk, and with HY spreads close to historical lows, the potential upside has become limited while the downside remains meaningful if economic conditions weaken or risk appetite turns.

Capital was instead redeployed into areas offering stronger risk-adjusted income, including agency mortgage-backed securities (MBS) and equity-linked notes.

In particular, technical selling and shifting supply-and-demand conditions had pushed agency MBS spreads above those available from investment grade (IG) corporate bonds, despite their government-backed credit quality and strong liquidity. The high-conviction allocation to agency MBS also stemmed from it offering additional yield, limited credit risk and discounted valuations compared with US Treasuries.

This is the essence of dynamic income investing: demanding sufficient compensation from an asset class before allocating to it, and not choosing to own it simply because it has traditionally been part of an income portfolio.

Beyond conventional income assets

Opportunities also exist in equities, although selectivity is essential when valuations are elevated across parts of the market.

Notably, well-capitalised US banks are worth a look at the moment. Trading at approximately 12-times forward earnings while offering double-digit earnings growth³,that combination of valuation and growth offers potential income and capital appreciation that many in the wider market have been slow to recognise.

The search for income can extend beyond traditional dividend stocks and bonds. Covered-call strategies, for example, can harvest volatility from individual stocks and generate income when corporate credit offers insufficient value. This strategy can also produce returns in range-bound markets rather than relying solely on rising equity prices.

Ultimately, genuine diversification means diversifying the sources of income. It’s a principle that resonates more clearly with investors as the traditional relationship between equities and bonds has proved less dependable. Although US Treasuries can still protect portfolios during a growth shock, particularly now that yields are materially higher,³ a year like 2022 showed that both bonds and equities can fall together when inflation and rates drive markets.³

A broader defensive toolkit can include a mix of: catastrophe bonds, whose returns have little connection with financial markets; agency MBS, whose spreads are shaped partly by prepayment dynamics; and equity-linked strategies, capable of earning income independently from interest rates or credit spreads.

The danger investors must avoid is a portfolio that looks diversified but still holds several asset classes and is still making much the same bet in each of them.

Flexibility also applies to interest rate exposure, which should respond to changing conditions rather than remain fixed. This can mean extending it if real yields become more compelling, or shortening it if the balance of inflation and fiscal risk deteriorates.

Look beneath the distribution rate

It has also become increasingly important to assess an income strategy beyond its stated distribution.

The distribution rate is a starting point, not the whole picture. For example, when a fund distributes more than its portfolio earns, part of the payment may come from capital. That can create the appearance of an income stream while eroding the investor’s principal and weakening long-term compounding. Instead, sustainable income must be earned through portfolio yield, not manufactured from capital.

This risk becomes more acute during market declines, when maintaining a distribution may require managers to crystallise losses at an unfavourable time.

As a result, the strongest income strategy may not be the one offering the highest distribution today. Fund selection should pay closer attention to factors such as where that distribution comes from, what risks are being taken to sustain it, and whether the manager is prepared to walk away when the numbers no longer add up.

Loomis Sayles is currently celebrating its 100^th birthday and the Growth Equity Strategies Team its 20^th. Find out more about the Team’s long term investment approach, with its unwavering focus on quality, growth and valuation. 

1. Source: ICE BofA US High Yield Index, https://indices.ice.com/
2. Source: ICE BofA US High Yield Index, https://indices.ice.com/
3. Bloomberg, as of August 31st 2026

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