Diversification
Jordan Sriharan, multi-asset manager at Canada Life Investments, is another who has felt able to stretch his wings a bit when constructing an income portfolio.
The mandate he runs has an income target of 4 per cent, which is paid out monthly, and in 2023 he reduced his equity allocation by between 10 and 15 per cent, instead deploying the capital into investment-grade bonds.
He says with bond yields sufficiently high, he was able to focus the equity portfolio on stocks with what he believes to be greater growth potential.
Sriharan acknowledges this lower equity allocation may mean he misses out on some stock market growth in the comping period, but says he feels that the economic outlook is sufficiently murky that the level of sacrifice may be quite small in an income portfolio.
From a diversification point of view, McEntegart says the previous hunt for yield from an equity allocation forced investors into having higher levels of exposure to some markets, such as the UK, than they might otherwise have wanted to, but if they use corporate bonds for income they can move between a broader range of equity markets and sectors.
Darius McDermott, investment adviser to the VT Chelsea multi-manager fund range, is another who has upped the exposure to bonds in his income portfolio following a period where they yielded little.
But when it comes to creating his equity exposure, McDermott says his aim is to be “diversified by market cap, geography and investment style, with growth and value funds in the portfolio".
He adds: "We also own Asian, European UK income funds, and some small cap funds, and a pair of global equity income funds, M&G Global Dividend and Guinness Global Income.”
Premier Miton's Jane says: “In the long term, you might expect equities to outperform fixed income, so you tend to be a seller of equity over time to maintain the asset allocation balance. These equity gains are in effect reinvested to increase the more stable, bond income stream.
"As we do not run an income style fund, we own at various times a fair amount of non-dividend paying growth stocks. Gains on these can be regularly reinvested into higher yielding, more mature equities. The key is a consistent and growing income stream from the fund as a whole.
"When equities are weak relative to bonds it is often the case that bond yields are relatively low, so we can reduce bonds in favour of higher yielding equities. These are powerful arguments for a mixed asset approach to income generation.”
