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United Kingdom
DATC 3327- Article
Nisha Thakrar
Client Solutions Specialist Based in London
October 18, 2021
KEY TAKEAWAYS
  • Prolonged low bond yields and an uncertain macroeconomic environment have recast the role of traditional income assets. As such, investors may need to broaden their approach.
  • Drawing on the total return and natural income (dividend or coupons) of assets can widen the sources of income within a portfolio and offer flexibility in how the income is paid out. This helps support sustainable income.
  • Global higher-yielding fixed income’s higher income and total return characteristics can meaningfully add value to income solutions, so long as the risks are managed by strong credit analysis.

With bond yields staying low, where can savers and investors hunt for income without taking excessive capital risk? How do they respond to an uncertain macroeconomic environment? Global higher-yielding fixed income could enable investors to generate sustainable income.


The challenge of generating an income


Dividend-paying stocks and high-quality bonds have long been at the helm of income solutions. But their variability of income and collapse in yield1 mean the pursuit of income (using a natural income approach) has become complex.


Key challenges investors face with generating income from traditional assets:


Traditional income assets are still foundational to income solutions, but in this period of low yield and macroeconomic uncertainty, their role has shifted. Investors will need to consider broadening their approach if they are to achieve sustainable income.

 


1. Based on bond yields since the global financial crisis to 31 August 2021. Source: Refinitiv


2. As at 31 December 2020. Source: Janus Henderson Global Dividend Index report


3. Based on US equity indices as at 31 April 2021; A Case for Dividend Growth Strategies. Sources: S&P Dow Jones Indices


4. Return difference for MSCI World Growth and MSCI World Value, in GBP with net dividends reinvested, from 30 April 2007 to 31 October 2020. Source: Refinitiv


5. Can you really invest sustainably and still get a good income? As at 31 December 2019. Sources: Schroders, SustainEx


6. As at 31 July 2021. Bloomberg Global Negative Yielding Debt Index. Source: Bloomberg


7. As at 31July 2021. Source: Tradeweb


8. Data from 31 December 2019 to 31 March 2020. Gilts represented by FTSE Actuaries UK Conventional Gilts over 15 Years Index, UK Corporates by ICE BofA Sterling Non Gilts Index and Global Equity by MSCI World Index with net dividends reinvested. Source: Refinitiv


 

Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Nisha Thakrar is a senior manager within the client solutions group at Capital Group. She has 19 years of industry experience and has been with Capital Group for 16 years. Earlier in her career at Capital, she was the manager of product development for the European business. Prior to joining Capital, Nisha worked in investment administration and for the FundsNetwork™ platform at Fidelity International. She holds a master’s degree with honours in electronic engineering with computer science from University College London. She also holds both the Investment Management Certificate and the Chartered Financial Analyst® designation. Nisha is based in London.

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