- Head of Multi-Asset Strategy – APAC
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
When focusing on income, and especially when seeking to generate even more of it, investors should be mindful of the implicit biases, risks and trade-offs that could arise. In this discussion, we focus on income vs capital return.
Total return is a combination of capital return (the growth of the capital invested) and income return (the interest received on that capital). Looking across asset classes, the relationship between capital return and income return generally changes as the level of income changes. In short, generating higher income in multi-asset portfolios tends to come at the expense of capital return. This does not mean that total return decreases, but rather that the mix of capital and income returns changes. We examined these dynamics for a variety of asset classes since 1995. As shown in the chart, more income doesn’t necessarily mean higher total return.
To understand why this trade-off exists, consider the example of high-yield credit. Investors can potentially increase expected income in their portfolios by adding exposure to higher-yielding bonds, but doing so will increase credit risk. This means they are more likely to experience defaults that lead to a negative capital return. High-yield bonds may also have limited capital return potential as they typically trade below or near their par value, given they typically have short maturities, and many are callable.
For investors seeking income in multi-asset portfolios, it may be prudent to strike a balance between income return and capital return, which can each be important for different reasons. Focusing too heavily on high-income-producing assets may not only limit capital appreciation potential, but may also restrict the opportunity set.
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As a new investment era takes shape, where should investors focus their attention in 2024? For multi-asset strategist Nick Samouilhan, three areas are top of mind: higher yields, the importance of stock selection and how to position for structural change.
Why income-seeking investors need to look across asset classes
Income plays an even more crucial role in portfolios than many of us realise, contributing a significant portion of returns for multi-asset portfolios. But with cash rates at around 5%, the world of income has changed. This should prompt investors to take a fresh look across asset classes to see where opportunities lie.
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With several macro crosscurrents at play, Portfolio Manager Peter Wilke suggests that income-oriented investors not lose sight of the “big picture” in their quest for yield.
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Is China’s recovery already running out of steam? Macro Strategist Santiago Millán assesses the outlook for China and Asia and sees longer-term momentum for growth.
Three macro assumptions that could be just plain wrong
Fixed Income Portfolio Manager Brij Khurana offers his non-consensus take on three entrenched, but potentially flawed, beliefs in today's market environment.
On to the next crisis: Glimpsing a post-SVB world
Amid the turmoil in the US banking sector, Global Investment Strategist Nanette Abuhoff Jacobson suggests investors consider pivoting to a “risk-management mode” that favors higher-quality assets. (Published 14 March 2023)
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Multi-Asset Strategist Supriya Menon shares her latest perspectives on the collapse of Silicon Valley Bank Financial Group (SVB) and the unfolding implications for investors. (Published 14 March 2023)
Four mission-critical investment ideas for 2023 and beyond
Multi-Asset Strategist Nick Samouilhan and Investment Strategist Michelle Ng offer their latest perspectives on the 2023 outlook and some actionable takeaways for investors.
Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees. Source: Wellington Management
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