What are the key opportunities for investors to generate attractive and sustainable income?
We see income as a perennial request from investors. In the current market environment, investors have choices as to where they can source income from. However, it’s important for investors to pay extra attention to the ability of their income source to protect the real purchasing power of their capital. We believe using diversified sources of income is a better way of providing a more sustainable income stream. We start with dividends from equities. By opting for income from equities, investors also benefit from the possibility of greater capital growth and more robust real returns over the long term. To provide further stability of the income stream and boost the overall income profile, we choose to add an options overlay that generates additional income in the form of premiums from selling call options. Having multiple income levers helps us to generate an attractive and sustainable income for our investors.
How does a dynamic process using diversified sources of income also help navigate challenging market environments?
When markets are challenged, strategies relying on one driver of return or income can be put under strain. For example, during the Covid-19 pandemic many companies around the world were forced to cut or suspend their dividends. Income strategies relying solely on dividends may have missed their targets, or been forced to sell out of companies at unfavourable prices to seek out dividend paying stocks. This is where the power of a dynamic and diversified approach comes into play. If the dividend yield falls in the portfolio, the income generated from selling covered calls can make up the short fall. During times of market stress, volatility is often elevated which acts as a tailwind for option strategies. Using a dynamic approach we can take advantage of the heightened volatility and adjust the option overlay to generate the required level of income while preserving potential upside.
Why is it beneficial to blend quantitative and qualitative approaches?
Quantitative and qualitative approaches each have their own unique benefits. Blending these approaches results in an objective, disciplined and repeatable process. Quantitative tools and models allow us to cast a wide net and analyse thousands of companies in a consistent and efficient way against a wide range of fundamental factors. This provides an effective initial screen to refine an investment universe, enabling us to identify attractively valued and high-quality companies with positive market sentiment. Qualitative analysis can then be used to further refine the universe and build conviction in the companies through detailed understanding of their business models and risks associated. As systematic investors we recognize that not all risks are captured within our models, so adding an additional qualitative review helps to account for and capture the risks outside of our models. We believe by blending the best of these approaches we can deliver a more robust portfolio to meet the income and total return needs of our investors.