In spite of the sharp rally – and corresponding falling yield – of most risk assets over the last 12 months, we are finding no shortage of opportunities for our multi-asset income mandates.
With many corporate bond funds having produced record returns, the once in a lifetime opportunity no longer exists in this asset class. We have reduced exposure to more interest-rate-sensitive areas but are comfortable with investment-grade corporate bonds as a reliable source of income with areas such as financials and many asset-backed securities still offering good potential.
We increased exposure to UK commercial property during the second half of last year and while we are not expecting a V-shaped recovery in this market, the sector now provides a good source of income and should enjoy some further capital appreciation over the medium term.
Operating within a non-Ucits retail scheme structure, we are able to access bricks and mortar open-ended funds and their closed-ended equivalents. Open-ended funds have enjoyed huge inflows over the last few months and, with the majority yielding in excess of 5 per cent, income from these funds looks attractive relative to both gilts and equities.
But it has come as no surprise to us that those funds that have enjoyed the biggest inflows recently have also generally produced below-average returns over the last few months and, with cash producing negative returns after charges, our strategy has been to avoid the big money-takers.
Our view remains the closed-ended area continues to be more suitable for what is one of the most illiquid assets. Investors should be wary of gearing levels but property investment trusts yield significantly more than their open-ended equivalents with the majority still trading at a discount to net asset value.
The dividend outlook for the UK equity market is looking somewhat perkier but we are concerned over concentration of dividends, with six stocks accounting for around half the overall payout of the FTSE all-share index.
We have diversified into a number of structured products that have produced a more reliable income stream and, to a lesser extent, smaller companies which can provide both a higher yield than the market as well as having significant diversification benefits.
Gilts and most other government bonds continue to produce a reliable source of income but are a no-go area for us. This asset class has enjoyed a 20-year bull market and, with interest rates at record lows and public finances of many developed nations in disarray, we can only see prices going one way in the medium to long term and that is down.
David Hambridge is investment director of pooled funds at Premier Asset Management