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Summary

  • In the face of choppy equity markets so far in 2014, the multi-asset income product class is doing fine.
  • Though they struggled during the rate rise scare of Q2 2013, their balanced portfolio approach is proving to be a winner rewarding investors with better-than-bond returns over the recent horizon.
  • Big decisions still need to be made at the asset mix level, since returns in this income-generating space are broadly dispersed and driven by their bond or equity profile.

Last July 2013, I wrote a review of an article by Barrons on the burgeoning multi-asset income product class filled with interest rate sensitive assets including bonds, TIPs, dividend stocks, preferred stocks, REITs and energy MLPS. I highlighted things to consider in this asset class and, most importantly, emphasized the weaknesses they showed during the Q2 2013 rising rate scare. As time has elapsed, and rate rise scares have mostly subsided, their return profiles have stabilized, rewarding investors.

If you were a conservative, long-only bond investor on January 1, 2013 and decided to ride out uncertainty in the market in a broad bond index fund over this 15+ month period, you were rewarded with a big fat 0% return through Monday April 21, 2014 (actually 0.2%, if you were invested in AGG, see Table 1 below). You could have done worse, of course, being in inflation-protected bonds (TIP) at -5.8% or Treasury bonds (IEF) at -3.2%, but you get the idea. Lower risk strategies over this period were quite definitely lower return (negative!) strategies.

The risk environment over this horizon turned out to be great for risky assets, as we now all know. As seen from the Table 1 below, risky assets in the income-generating space did very well in some sectors and not so well in others.

Table 1. Income-generating ETFs and Multi-Asset Income products

Ticker

Product Name

2013

YTD Apr. 21, 2014

Cumulative: 2013 + YTD thru Apr. 21, 2014

Volatility (Short horizon Std. Dev.)

Income-generating ETFs:

DVY

iShare Select Div

28.9%

4.7%

34.8%

10.4%

VNQ

Vanguard REIT

2.3%

12.5%

15.1%

14.6%

EMB

iShares EM Bond

-7.8%

5.1%

-3.1%

9.4%

JNK

SPDR Barclay Bond

5.9%

3.2%

9.2%

5.2%

MLPI

UBS Alerian MLP

27.1%

6.5%

35.3%

12.5%

BKLN

Powershares Sr. Loan

4.1%

0.5%

4.6%

2.1%

PFF

iShares Preferred Stk

-1.0%

7.7%

6.6%

5.2%

AGG

iShares Core Bond

-2.0%

2.2%

0.2%

3.5%

IEF

iShares 7-10 yr Tsy

-6.1%

3.1%

-3.2%

5.9%

TIP

iShares TIPS Bond

-8.5%

2.9%

-5.8%

6.2%

Equal-Weighted

4.3%

4.8%

9.3%

7.5%

Multi-Asset Income Products:

JNBAX

JP Morgan Income

9.2%

2.7%

12.2%

6.9%

CBUZX

Columbia Income

6.5%

3.0%

9.6%

4.8%

BAICX

Blackrock Multi-Asset Income

9.1%

2.6%

11.9%

4.8%

CVY

Guggenheim Multi-Asset Inc

19.5%

3.3%

23.5%

9.3%

INKM

SPDR Income Alloc

3.0%

4.7%

7.9%

8.3%

IYLD

iShares Multi-Asset

0.4%

7.0%

7.4%

8.3%

S&P 500

32.4%

1.9%

34.9%

9.3%

Barclays U.S. Agg

-2.0%

2.2%

0.1%

3.1%

Per the table above, specific ETFs in the income-generating space had a wide dispersion of returns from +34.8% to -5.8%, making the asset mix decision quite critical to success. Interestingly, an equal-weighted approach smoothed out the dispersion with good results, but some excess return was not captured. Confounding the problem even more, though higher risk assets did generally produce higher returns over this short horizon, and vice versa, the relationships were not linear. The riskiest and least risky strategies did not perform as expected.

For example, bank loans (NYSEARCA:BKLN) with the lowest volatility (15-month standard deviation) of 2.1% came through with 4.6% return compared to 0.2% return for broad bonds (NYSEARCA:AGG) with a volatility of 3.5%. At the other extreme, REITS (NYSEARCA:VNQ) with the highest volatility at 14.5% produced a 15.1% return compared to the S&P 500 return of 34.9% and a lower risk of 9.4%.

There are some ready-made solutions in the mutual fund, ETF, and ETF-managed account space to help with this important asset allocation decision. Most of the multi-asset income products are long-term strategic in nature, so it is important to understand what drives the specific multi-asset income products before you buy them.

For example, Guggenheim (NYSEARCA:CVY) makes no apologies for its lofty 9% volatility and 23.5% total return, since it is firmly entrenched in the equity-based multi-asset income space with modest bond weightings. Likewise, iShares (BATS:IYLD) underperformed other multi-asset income products in 2013 since it has a heavier strategic bond weighting, but has performed well so far during 2014 for that exact reason. The mutual fund contenders take a different approach with both JP Morgan (JNBAX) and Columbia (CBUZX) having broadly diversified strategic asset allocations with no tilt one way or the other. Rounding out the story, some of the new realm of ETF strategists manage the asset mix dynamically by making tactical decisions to overweight the income-generating asset class that is most likely to outperform in the given risk environment, without any predisposed strategic direction.

As always, you need to know what you are looking for before you invest. The period from Jan. 1, 2013 to April 21, 2014 included a rate rise scare followed by a period of normalcy that stabilized returns from the bond-focused multi-asset income products. Equity-focused strategies will have higher volatility and over a longer horizon, should produce higher return. Broadly diversified solutions between bonds and equities will perform somewhere in the middle.

Source: Multi-Asset = Multi-Risk? An Update