"But the problem with that strong performance from some income products is that it was very concentrated on a small area of the market. Really you had to be invested in growth stocks, and that has unwound in recent times as growth has started to underperform.”
Chasing yield
In common with Klempster, he says the previous market conditions also forced investors to “chase yield”, that is, own riskier assets. “Many income portfolios that were probably not intended to be very high risk, ended up with significant exposure to assets such as high-yield bonds, and emerging markets."
He says it is “very difficult to chase yields when inflation is at the current level, but it is best not to just buy the most high-yielding asset. Instead have a balance of assets, including some that have low yields now but can grow their yields in future.
"The other consideration is that people are living longer in retirement. And that may mean they need to own more growth assets in income portfolios – they cannot just degrade the pot of capital by taking income from it. That might have worked in the past, but not now.”
In contrast, Kevin Thozet, multi-asset investor at Carmignac, takes the view that some of the traditionally riskier assets are, right now, priced at such a level that they are attractive income investments.
He cited high-yield bonds as an example, saying the yields available are almost double digit right now as a result of the sell-off in the asset class.
High-yield bonds have a credit rating of below BBB, and so are the most likely fixed income instruments to default.
But Thozet says prices have fallen so far now that a default rate of 10 per cent is implied by the valuations, and this is far below the levels of history, even in periods of economic stress.
He says that while high-yield bonds are more volatile than those issued by governments, the risk of permanent loss of capital is much lower than has been the case in the past, so clients with the capacity to tolerate volatility may find high-yield bonds attractive.
Seeking growth
David Coombs, head of multi-asset at Rathbones Unit Trust Management, says he has started to invest in high-yield bonds of late as a result of the yields being attractive, but also because the short-duration nature of those bonds means they are less sensitive to interest rates.
In terms of equities, he says investors will shortly start to switch to growth equities and away from value equities. He says the focus needs to be on total return, rather than the highest income, as the latter likely means a capital loss.
