With more cuts forecast as the year goes on, but – importantly – inflation set to remain elevated, investors may need to be smarter about how they generate an income from their investments.
The chances are that investors will already have some income-generating funds in their portfolio. They may have a global or UK equity income fund, for example. Perhaps that might be balanced with a diversified bond fund. If you haven’t, then that would be a good place to start, and we’d suggest funds such as Fidelity Global Dividend, or Rathbone Income (for the UK), and then perhaps Man Dynamic Income on the bond side.
However, on the assumption that you already have that type of thing in your portfolio, it can be worth reaching out into alternative parts of the market. This can bring greater diversification, which should help with the stability of your income. These options may also bring higher income and greater inflation protection.
Real assets
‘Real assets’ are those assets that you can see and touch. It includes areas such as property, infrastructure, or commodities. Vince Childers, manager of the Cohen & Steers Diversified Real Assets Fund, says a portfolio of real assets will generally provide three things: inflation sensitivity, diversification, and returns. He says: “The expected diversification provided by holding bonds and equities tends to break down if inflation is higher than expected.” 2022 provided a real-time proof of concept for real assets, when bonds and equities fell at the same time, but diversified real asset portfolios saw gains.
These assets also tend to pay a high inflation-adjusted income. The Cohen & Steers Fund invests across property, infrastructure, commodities futures and natural resources, and it has a yield of just over 4%. That may not sound a lot, but it should rise ahead of inflation, and there is the potential for capital growth as well.
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Asian equity income
The problem with many dividend-focused funds is that they are limited to a handful of sectors. Certain sectors tend to pay high dividends – oil and gas, healthcare, banks – while others – such as technology – do not. This can mean that equity income funds don’t see the chunky capital gains that are available in other parts of the market.
This isn’t the case with Asian equity income funds. Across Asia, technology companies are quite happy to pay dividends. Semiconductor giant TSMC, for example, has paid a dividend since 2005. Asian equity income funds can also tap into higher dividend markets, such as Australia and Singapore. We like the Schroder Asian Income Fund and the Guinness Asian Equity Income Fund.
Emerging market bonds
Emerging market bond funds are focused on debt issued by Governments and companies based in emerging markets, such as Brazil, Mexico, South Africa or Indonesia. The advantage with this part of the market is that because these bonds are considered to be higher risk, they pay a notably higher level of income. The distribution yield of the M&G Emerging Markets Bond Fund, for example, is 6.9%. Yet, in many cases, the risk won’t be very different from developed market bonds. Bonds in the M&G fund primarily have a credit rating of BB+, which is only just below investment grade. Nevertheless, there are risks, so an experienced manager is crucial. Claudia Calich has run the M&G fund for more than a decade.
Renewable energy
It’s been a tough time for clean energy investments. They have had to recover from some share price exuberance during the pandemic, at the same time as there were well-documented problems in some of the clean energy sectors. Wind energy suffered from inflationary pressures, while solar energy suffered from cheap competition from China.
Yet, the energy transition is still likely to be a major force in the global economy for the next 20-30 years. Countries continue to pour money into creating new infrastructure and renewable energy sources, both to ensure energy independence and security and to reduce their carbon emissions.
The VT Gravis Clean Energy Income Fund invests in a portfolio of securities listed in developed markets, involved in the operation, funding, construction, generation and supply of clean energy. It has a yield of 6.58% and its major holdings include investment trusts such as UK Wind, Clearway Energy and Meridian Energy. Gravis is a specialist in property, infrastructure and clean energy investment.
Multi-asset approach
And just finally, if you’d prefer not to do all the heavy lifting yourself, you can pick a fund such as the Jupiter Merlin Income Portfolio or BNY Mellon Multi-Asset Income, which give you a diversified portfolio ‘off the shelf’. They will move between assets depending on where they find value, while keeping a core holding of bond and income funds.
There – now you have no excuse for leaving your savings in a boring old cash account, watching your interest rate fall.
Juliet Schooling Latter is research director of FundCalibre and Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
