Fixed income, Equities Where can I find portfolio income?

CIO advises investors to find more durable sources of income, including in longer-duration fixed income, equity markets, real assets, and structured investments.

Cash and money market funds have become more appealing recently.

• The yield on the 3-month US Treasury stands close to a 23-year high of 5.45%, as of 17 August.
• Short-term rates have risen 525 basis points compared to the start of 2022.
• Both the Fed and ECB raised rates in July, with markets still pricing for potential further hikes given resilient economic data and above-target core inflation.

But we believe the attraction of cash is likely to prove short-lived, and investors should lock in durable income.

• Both the Fed and ECB signaled that an end to rate rises is likely near at hand after hiking 25 basis points at their July meetings.
• Investors can take this opportunity to lock in attractive yields before markets start to price lower rates in the future.
• We believe investors should consider reinvestment risk - the chance that yields on maturing fixed income instruments are higher than those on new securities.

We think it's time to add exposure to bonds.

• We favor higher-quality segments of fixed income, given the all-in yields on offer and the potential for capital appreciation as growth and rates fall.
• Investors can also find attractive income opportunities in equity markets, through high-dividend and quality stocks.
• Yield-generating structured investments can offer alternative ways to add durable returns.

Did you Know ?

• The Federal Reserve hiked by 25 basis points at its July policy meeting, taking rates to the highest level in 22 years and marking its 11th rate increase in its last 12 meetings.
• The MSCI World High Dividend Yield index offered a 3.7% yield as of 31 July. These equities are mostly in the more defensive parts of the markets and are relatively resilient when the economy slows—as we expect these dividend payments to be relatively stable even in the event of a recession, based on historical experience.

Investment view

Surprisingly robust economic data has boosted bond yields, providing investors with a good opportunity to lock in currently elevated rates for an extended period. In fixed income, we like opportunities in the 5–10-year duration segment; in high grade (government), investment grade (incl. select senior financial debt), and sustainable bonds. Exposure to actively managed income strategies and yield-generating structured investments can help investors take advantage of the breadth of opportunities.

Main contributors - Christopher Swann, Vincent Heaney, Matthew Carter

Original report - Where can I find portfolio income?, 18 August 2023.