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“Unprecedented” and “uncertain” have been the buzz words of the last few months. They’ve been used exhaustively to describe the pandemic, and it’s hard to avoid them when talking about anything related to COVID-19. Investments are certainly no exception. To our minds, income for investors has never been harder to come by. We’ve witnessed such unprecedented cuts to cash rates and to dividends that uncertainty is everywhere for the ‘income-seeking investor’. Undoubtedly, the ‘income cupboard’ has been raided, but it is not bare.

Some areas of fixed interest can provide encouragement to clients with an appetite for investment. Our innovative Fixed Interest solution currently provides investors with an expected return of over 5% with most of this coming in the form of income payments. We believe that this is attractive for income seeking clients who are comfortable taking on a moderate degree of risk to achieve these returns.

We don’t believe we are exaggerating in saying that income has never been harder to come by, with the more traditional avenues, such as Government Bonds and Equity Income products, offering a much less attractive yield than they once did.

So, in the absence of a vaccine for the virus, policymakers have taken to injecting the economy and financial markets with vast amounts of cash. This has prompted a big recovery in mainstream assets, whilst questions over future earnings, profitability and the return to paying dividends remain unanswered.

Unearthing these sorts of opportunities is not easy; it requires expert skill, and full transparency is key.

Record low cash rates and the cuts to equity dividends have marked an abrupt halt to the familiar routes for income: namely, cash and equities (notably UK equities). Simultaneously, the huge government and central bank spending packages have had three key impacts:

1. Pricing inconsistencies and anomalies
They have helped to prevent a global recession from becoming a global depression, but they have also hiked up mainstream asset values, which means that for the majority of investments, they are now pricing in a full and very fast recovery.

2. Potential for inflation risk
Less obvious is the future inflationary impact of this additional quantitative easing. There is doubtless a deflationary impact as companies and consumers tighten their belts, but inflation could well follow. This might be welcomed by governments who have issued considerable levels of debt; however, this would eat into any income that investors are receiving on their assets.

3. Revaluation of income producing assets
Many of the assets that investors might ordinarily turn to in the hunt for income have seen rampant mark-ups in price, or, as in the case of the aforementioned UK equity market, a short-term cut to their income characteristics.

Despite the aforementioned trends, we believe that certain areas of the fixed interest markets, notably credit, still represent good value and at present, the current opportunities we are seeing can provide investors with an expected future return of around 5% per year*, with the bulk of this (circa 80%) coming in the form of income.

Our credit investments have seen a good recovery from the late-March lows, but have flown under the radar to some extent. By actively allocating across the best specialist credit fund managers that we can find, we’re able to reassure our income-seeking clients in our ability to deliver consistent levels of income, thereby helping them to meet their objectives. Moreover, our portfolios have been stress tested to withstand reasonable levels of default, and we believe that our headline expected return of just over 5% remains realistic and not overly ambitious. Furthermore, we believe that the decisions that companies are now taking are “bondholder friendly”; the cessation of dividends, the use of additional credit lines from banks and the conservative actions of management teams should all help to shore up businesses.  This will create the optimal environment to pay committed coupons and pay back at the redemption date.

Unearthing these sorts of opportunities is not easy; it requires expert skill, and full transparency is key. As such, we look to set up bespoke mandates with certain investment managers, whereby they manage a pool of money in a separate fund designed to meet our specific needs and those of our clients.

This provides us with transparency in terms of the underlying investments and creates more surety about what the return outcome might look like. Being the sole investor in such a mandate also means that we can collaborate to pick the most attractive parts of the market whilst at the same time ensuring that we can manage and maintain liquidity.

Although no investment can be guaranteed, we believe there is a compelling opportunity for investors willing to look at slightly less traditional types of income investment in favour of a more targeted and dynamic approach.

*This data represents the performance of the Punter Southall Wealth Fixed Interest Portfolio Service. All performance figures above are shown net of underlying fund charges and net of Punter Southall Wealth Investment Management fees applicable at the time.

Rory McPherson, Head of Investment Strategy

 

 

Important information:

This communication is prepared for general circulation and is intended to provide information only. The information contained within this communication has been obtained from industry sources that we believe to be reliable and accurate at the time of writing. It is not intended to be construed as a solicitation for the sale of any particular investment nor as investment advice and does not have regard to the specific investment objectives, financial situation, capacity for loss, and particular needs of any person to whom it is presented. The investments contained in this communication may not be suitable for all investors. Prospective investors should consider carefully whether any of the investments contained in this communication are suitable for them in light of their circumstances and financial resources.

If you are in any doubt whether any of the investments contained in this communication are suitable, you should seek further appropriate advice.

Investment Risks:

The value of investments and the income from them can fall as well as rise. An investor may not get back the amount of money that he/she invests. Past performance is not a guide to future performance.

Foreign currency denominated investments are subject to fluctuations in exchange rates that could have a positive or adverse effect on the value of, and income from, the investment.

Investors should consult their appointed advisers on the possible tax and other consequences of their holding any of the investments contained in this publication.

 

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