In a note out on Tuesday, the firm pointed out that the opportunity set of assets yielding above 5% is noticeably smaller than it was before the financial crisis, which has forced multi-asset managers to look beyond those asset classes that offer a high degree of capital protection and has made diversification difficult to achieve.
And, increasingly, it said, it is starting to see signs that some managers are starting to swap capital for income.
“We find various call option strategies in place today, where the manager is forgoing capital upside in exchange for income from call option premiums. They typically give up some of the equity upside and convert it to income. These are, to the sceptical eye, potential signs of income being manufactured from capital,” it said.
This does not imply that all multi-asset funds are becoming risky, the group is quick to add, but rather that, in the short run, with yields as low as they are, investors should assume that “some compromises are likely to be made” to factors such as bond quality and liquidity.
The lack of diversification could also lead to an increase in equity-type return profiles from some funds, the group said.
While yields remain low, the demand for income is likely to continue to outpace supply, Fundhouse said, and a multi-asset team “has all the tools to work around this problem” because they are not, at least in theory, beholden to any one asset class to deliver yield.
When finding a multi-asset income manager, we spend a substantial amount of time probing the manager on their attachment to a yield target. Are they reaching for yield or would they drop their yield target to protect capital through better portfolio diversification? We prefer the latter.”