It may be a classic case in behavioural finance studies for decades to come: investors scoured markets for yield and in some cases were forced to turn their back on traditional risk management.
Like moths to a light, capital rushed into single income-bearing assets, but the more people pursued sustainable, rewarding income, the dimmer their prospects became.
Now, an elegant new approach to risk is giving investors an opportunity to rebalance, in the face of particularly expensive income-generating assets.
THE STICKING POINT
Years of constrained monetary policy and laborious growth rates have kept sustainable income elusive.
Where traditionally bank deposits and government bonds might have provided an option, their persistently low yields are failing to meet clients’ needs.
The alternative – a rigid focus on picking the high-yielding individual securities – leaves investors vulnerable to downside risks or wider market shocks.
While there is a modest change underway, as global growth slowly picks up and interest rates offshore head north, investors looking for sustainable income are still left somewhat in the lurch.
When it comes to asset classes, solid earnings in US equities indicate the global growth story is fairly broad. The normalisation of monetary policy, with interest rates inching higher, has introduced volatility back into markets.
And while this is positive for yields generally, income assets are still rather fully priced.
“We’re in this modestly positive growth environment at the moment and are seeing a pick-up in volatility, which is novel,” says David Griffith, head of BlackRock Australia’s multi-asset investment strategy team. “But income-bearing assets have been heavily bid up in the hunt for yield in recent years, making it extremely difficult for those thinking about retirement or already there.”
It’s true that global economies are converging around modest growth rates, led largely by a recovery in the United States, but assets that have generally offered income have become too highly priced for comfort.
“Those in retirement with regular bills or other spending commitments are looking for steady and consistent distribution of income as their primary objective,” Griffith says. “But that’s really difficult to find without an uncomfortable level of single-asset risk.”
Developing a strategy around multi-asset investing is emerging as a palpable choice for money managers, who are searching for ways to increase yield without extending themselves or their clients towards uncomfortable risk tolerances.
“There needs to be a reset in the way we think about future returns from markets and associated risks,” Griffith says. “Particularly when it comes to seeking income.”
A NEW APPROACH
Traditionally, multi-asset strategies begin with an income target and risk is adjusted up and down to maintain the desired level of income; however, when yields decline, managers are finding they are reaching further outside their comfort zones and taking on more, and perhaps unnecessary, risk in order to maintain that income.
“Certainly, you need to take some risk because term deposits and cash might not fund your spending needs,” Griffith says. “But what is reasonable? Advisers have been asking how to solve the income problem for a while now and we’ve decided to flip the problem on its head.”
The BlackRock Global Multi-Asset Income Fund has emerged as a unique and powerful option, as it handles income from a risk-first perspective, allowing investors to generate yield while lowering their risk exposure.
Griffith explains the fund starts by establishing a “risk ceiling”. This serves as a fixed parameter for portfolio managers and other investment specialists, who then maximise income for clients without breaching the ceiling.
“That ceiling is based on a simple benchmark of 50 per cent equities and 50 per cent bonds,” he explains. “We then layer a tactical asset allocation approach that seeks the most useful risk-adjusted yield opportunities around the world.
“Broadly, the strategy is looking to deliver an attractive level of yield while preserving capital and maintaining risk.”
That 50/50 split gives the investment manager capacity to establish an acceptable level of volatility over a Short- and medium-term time horizon. While low yields and a traditional income-target approach may nudge managers towards single assets that only hint at the possibility of higher returns, succumbing to such a narrow approach often blows out the risk tolerance. A ceiling on the other hand, provides a safe framework, within which an asset manager can construct a creative and compelling portfolio.
Griffith describes the ways the BlackRock Global Multi Asset Income Fund can assist Australian portfolios.
“The first way is as a source of retirement income,” he says. “Secondly, as a source of total returns.”
Australians are notorious for loading their retirement portfolios with Australian equities.
The attractiveness of franked Australian equities, which deliver an adequate yield, has formed the basis of that thesis for many years. But Griffith points out the BlackRock Global Multi-Asset Income Fund can deliver a similar result with less than half the risk.
“If you’re moving from the accumulation or growth phase, blending in the strategy is a good way of de-risking your portfolio without losing purchasing power and maintaining that same level of yield,” he says.
The second main appeal of the fund is its capacity to be a source of total returns.
Asset classes across the world are bracing for an extended period of challenging returns compared with recent history and, as such, future returns will probably be driven more by yield than by the capital appreciation we have seen in recent years.
“Given the strategy’s global exposure, the portfolio can be used to deliver returns like those in a growth portfolio but less than half the risk of straight equities,” Griffith says. “The strategy can be used as an additional source of returns while diversifying risk.”
Conservative investors – looking to preserve capital and peace of mind – could potentially reach a higher income without compromising the risk tolerance of the portfolio.
This bodes well for equity investors, who are typically familiar with higher yields; they are able to maintain their income levels without extending the risk tolerance of their portfolios.
The BlackRock Multi-Asset Income Fund invests in more than 10 asset classes, 40 countries and 20 sectors, which open doors to attractive income opportunities while dampening risk, thanks to a broad diversification strategy.
Zenith Investment Partners points out the stress testing conducted on BlackRock’s portfolio boosts the case for firm risk management, as does the team’s access to the wider BlackRock resourcing.
“Zenith believes the fluid interaction and access to BlackRock’s specialist teams, in conjunction with the ability to tailor discrete mandates to the specific needs of the fund is a key strength,” reads the latest report.
In an environment where short time horizons and low volatility could prompt an underestimation of risk, the research firm recommends the Global Multi-Asset Income Fund.
The insular nature of the Australian investing community and the general preference for local equities has meant that some miss out on the income opportunities internationally.
The challenge facing Australian advisers has been to discover local equities that are benefiting from the global pickup in interest rates.
“It’s unusual to see yields increasing elsewhere around the world but not in Australia,” Griffith says. “We’re a bit out of cycle, so having a global focus alleviates some of that pressure on local investors.”
Griffith says traditional income-producing sectors are not the focus of the international equity selection, which prefers instead the likes of the global healthcare sector, financials and industrials.
Since inception in October 2015, the strategy has delivered a 6 per cent annualised yield while preserving client capital, with less than half the risk of equities.