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Income investing opportunities

Added 17th February 2015

Income investing opportunities are available across a range of asset classes despite the low yield environment, attendees heard at Fund Selector Asia's recent Income Forum in Singapore.

Income investing opportunities

Asset management companies presented to fund selectors a range of ideas that can help address the demand for income.

Better yield on Asian credit

Omar Slim, portfolio manager for fixed income at PineBridge Investments, made a case for Asian fixed income in a disinflationary environment.

“Asia fixed income is generally higher yielding than the rest of world and has better fundamentals than most of the emerging markets. It is still an under-owned block."

He finds some interesting ideas in Indian and Indonesia bonds, which are offering better yields than many of the emerging markets. Furthermore, the current fall in oil prices works in favour of these oil importing countries in containing inflation and managing the current account balance.

“Low oil prices means GDP is going to have a boost. The current account balance has been an issue for countries like India and Indonesia. This year particularly, we might see a flat current account balance or slightly positive on the back of the fall in oil prices.”

He cited a sensitivity analysis of Asian countries to lower oil prices. For instance, a 10% decline in oil prices is estimated to boost India’s GDP by 25 basis and result in a 40 basis points decline in consumer price index inflation.

In Indonesia, growth is likely to see a 10 basis points improvement whereas inflation is seen falling by 40 basis points.

Slim said he prefers the Asian credit compared to Asian high yield, which is dominated by Chinese property companies.

“I would be a bit cautious on Asian high yield due to concerns over Chinese property. You need to have confidence in the corporate governance.

“Asian high yield is going to be increasingly dominated by China. It is an asset class that you cannot escape, but there are certain issues we try to mitigate by due diligence.”

Writing call options – extra yield?

Fiona English, client portfolio manager at Pioneer Investments, said the firm is enhancing some income strategies through covered call-overwriting.

“Volatility is not always a bad thing. But, sometimes you can use it to your advantage. We run a strategy to write call options on the stocks. We take either a basket of equities or basket of multi-assets and enhance the income through a covered call overwriting strategy and yet reduce the volatility of the products.

According to her, equities are one of the few asset classes where the yield is in line with its long-term history.

“It is harder and harder for investors to buy high quality companies from the credit market and get yield that satisfies their needs.”

She compared the yield on the recent seven-year bond issuance by Unilever, which offered 50 bps. Conversely, the dividend yield on the Unilever stock is 3% and the company has historically managed to grow the dividend by 7.5% over the last five years.

Sustainable growth in dividends is one of the parameters for investments.

“Companies that pay 6-7% yield are fine as a small portion of the portfolio. But, predominantly we are looking for high quality companies paying good dividend yield, which we think will grow and also offer capital appreciation.”

Broadening opportunity set

Sean Reynolds, portfolio manager at Goldman Sachs Asset Management, advocated a broad global multi-asset approach to cater to investors’ demand for income solutions.

“Broadening of the opportunity set is important. Moving away from the traditional balanced fund approach [investment grade bonds and common stocks] and looking to other parts of markets where you can find more attractive dividend yield and coupons from bonds.”

On the equity side of the portfolio, Reynolds said one of the ways to enhance the yield is by using REITS, energy infrastructure and business development companies. On the fixed income side, he cited using high yields, bank loans and emerging market debt along with investment grade corporates.




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