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Finding sustainable income in uncertain times

Is there an optimal combination of equities and fixed income to deliver strong, sustainable income?
Maya Bhandari, Columbia Threadneedle Investments

In an environment where yields across many asset classes are low, extracting natural income from traditional sources has become increasingly challenging. Yet the importance of investing for income has not diminished; if anything, demographic developments have raised their appeal.

Ultimately, investors want to achieve an attractive and sustainable level of income. Equities, while delivering good income, have high volatility; “old school” duration offers an altogether unappealing combination of poor income and total return prospects. Income-seeking investors must face these challenges head-on.

At Columbia Threadneedle we believe there is a way to achieve strong levels of income without taking on unnecessary risk, utilising a dynamic investment approach. With a focus on diversification, the right blend of income-generating assets across global equities and fixed income markets can be combined with the aim of achieving a strong and sustainable level of income, irrespective of the global macro environment.

Source: Morningstar, as at 31 August 2018. Based on 5 years annualized data. Global Equities represented by MSCI AC World Index. European Equity represented by MSCI Europe Index. Global Bonds represented by JP Morgan GBI Global Traded Index. High Yield represented by ICE BofA Merrill Lynch Global High Yield Index. All data expressed in USD terms. 60/40 portfolio as a proxy for a global multi asset-income strategy for illustrative purpose only.


According to Maya Bhandari, portfolio manager on the multi-asset team at Columbia Threadneedle Investments, this strategy can play a critical role in helping investors take advantage of income opportunities as they present themselves but also to protect capital when threats appear on the horizon.

“In a market where yields across many asset classes are low, well-managed global multi-asset income portfolios can provide an effective solution for investors seeking a strong and sustainable level of income, whilst keeping volatility in check,” Bhandari explained.

“Asset allocation is central to what we do as an organisation, and by using a robust and repeatable investment process we have been able to deliver and even exceed  our clients’ objectives in recent years.”


A globally-diversified approach 

A combination of flexibility and active management lies behind the approach of the Columbia Threadneedle (Lux) Global Multi Asset Income Fund in its quest to provide investors with a strong level of income while keeping volatility below that of an equities-only portfolio.

“The flexiblity in the Threadneedle (Lux) Global Multi Asset Income Fund manifests itself in two ways,” said Bhandari. “The first is the fund’s mandate to derive income from three diversified sources: equities, fixed income and the sale of covered equity call options. The second is by taking advantage of a truly global opportunity set to flex the mix of those sources as market conditions dictate.”

The fund benefits from active return sources at both the top-down asset allocation and bottom-up security selection levels. The principle of high-but-sustainable-income is apparent in the companies in which we invest, where we look not only for a high dividend yield but also a strong growth outlook and a robust balance sheet.

“We want a company’s leverage to be under 0.75, dividend cover to be 1.25 or more, and we look for companies growing both the dividends and earnings by 5% a year or more.”

Encouragingly, each of the three sources of income has contributed approximately equally since the inception of the Threadneedle (Lux) Global Multi Asset Income Fund. But each has stepped up at different times, demonstrating the benefits of a diversified approach to navigate uncertain markets.


Total return mindset

The fund aims to balance the need for income with longer-term capital appreciation is key to the strategy. We avoid the temptation to pay out headline-grabbing dividends, instead limiting the annual income distributions to 6%. Historically, we have not paid income from capital.

Since the inception of the Global Multi Asset Income Fund, we have delivered attractive and consistent levels of income, as well as growing capital, with around half the volatility of global equities.

Looking ahead, there are risks aplenty on the horizon. We believe that a dynamically managed multi-asset strategy is best placed to navigate this terrain to deliver investors with attractive levels of income and capital growth, in a risk-controlled manner.

Source: Columbia Threadneedle Investments

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