Asian investors’ strong preference for income-generating investments is well-known. While dividend-paying stocks have traditionally been popular, multi-asset income funds have also gained enormous success in Asia in the prolonged low-interest-rate environment following the 2008 global financial crisis. These funds typically offer attractive annualised dividend yields ranging from mid- to high-single digits, which are distributed monthly. They can also provide asset class diversification and capital growth potential, making them an appealing product to income investors.
However, the return of more normalised interest rates poses a challenge for these funds as income seekers turn to low-risk products like term deposits or money market funds that easily offer a 4-5% yield. Morningstar has recently published a study titled “Multi-Asset Income Funds: Navigating a Shifting Landscape” that examines whether multi-asset income funds are still relevant for income investors and how they are adapting to the new market environment of higher yields.
Should income seekers just go for cash/money market funds?
Investors should carefully consider the trade-offs associated with these short-term instruments. Firstly, their yields can fluctuate. For example, they may fall when central banks cut rates during an economic downturn, exposing investors to reinvestment risk as they roll over their term deposits or as money market funds continually reinvest their underlying securities. Secondly, their lack of upside potential suggests a dismal chance to beat inflation over time.
To achieve their income objectives, investors should weigh the long-term implications of their investment decisions and balance between growth and defensive assets. With fixed income assets now offering higher yields and better diversification potential, the investment outlook for multi-asset funds has improved and they can achieve higher payouts without taking on excessive risks. The improved buffer against downside risks provided by defensive assets today also preserves flexibility for these funds to capture capital growth opportunities in riskier assets, such as equities and high-yield credits.
| Pros | Cons | |
|---|---|---|
| Cash/Money Market Fund | Capital Preservation Low cost | No capital growth potential Unlikely to deliver a real return Reinvestment risk |
| Multi-Asset Income Fund | Asset class diversification Diversified income sources Potential for capital growth | Capital at risk Comparatively high cost |
How have multi-asset income funds been adapting to the higher-yielding environment?
Among the multi-asset income funds available for sale in major Asian fund markets like Hong Kong and Singapore, there has been a general trend of higher distribution yield and higher allocation to investment-grade bonds since the start of 2022. This reversed the previous downtrend from 2020 to 2021, when central banks’ rate cuts amid the coronavirus outbreak had compressed bond yields to historical lows and forced fund managers to take more risk through higher-yielding securities, such as high-yield credits, to maintain competitive payouts.
Overall, multi-asset income strategies do not need to stretch as much as the last few years to earn a decent payout for investors. They also have more levers to pull to balance risk and return, such as high-quality duration, investment-grade bonds and cash.
Look beyond the headline distribution yield
High distribution yields may be enticing but can also be illusory as they are not equivalent to returns and come with higher levels of risk. Our study reveals that multi-asset income funds with a higher payout saw a bigger decline in their capital over time. The reduced capital base often leads to lesser participation in future growth and, importantly, lower income distributions in absolute amounts.
Allianz Income and Growth is among the most popular multi-asset income funds in Asia and boasts a 9% annualised dividend yield. However, typically 75% of its payout relies on unpredictable short-term capital gains and the fund courts high downside risk as it invests equally into three highly correlated asset classes – growth-oriented equities, convertibles and high-yield credits. For instance, it lost 20% in 2022. Such a product design exacerbates capital erosion risk in volatile markets, which reduces the fund’s capital base and limits its scope to provide a stable income. In fact, the fund most recently reduced its monthly distribution in April 2023 – the fourth reduction since 2016.
Be selective
Multi-asset income funds remain relevant for income seekers, given their improved investment prospects, but it is crucial to balance between yields and risks to achieve a more consistent income and capital growth. Notably, these funds are not homogeneous and investors must select a fund that matches their investment objectives and risk tolerance. It is equally important to select managers who are prudent with their payouts to safeguard investors’ long-term outcome and have proven their flexibility in adjusting their portfolios through changing market conditions.
Bryan Cheung is associate director of manager research at Morningstar.
