One interesting and useful type of fund is what is called a multi-asset income fund. These are funds that hold a range of asset classes and for which the goal is to provide a high level of income. The manager of a fund can exploit diversification across asset classes managing risk, while seeking out higher-yield assets.
Examining Income Funds
There are three key questions for investors considering one of these funds:
1) How much income does the fund provide?
2) How risky is the fund?
3) What is the interest rate exposure?
4) What are the expenses?
I have summarized these key variables for a number of these funds in the table below. There is one ETF and four mutual funds. The mutual funds vary in terms of expense ratios, but all have loads. These funds range in yield from 4.4% to 5.5% and have trailing 3-year volatility levels ranging from 6.2% to 11.2%. For reference, the S&P500 has a trailing 3-year volatility of 12.5% and the Barclays Aggregate Bond Index has a volatility of 2.83%.
The iShares Corporate Bond ETF (NYSEARCA:LQD) has a yield of 3.8% and trailing 3-year volatility of 5.6%. It is notable, however, that LQD has a -52% correlation to 10-year Treasury yield which means that this asset class will tend to lose money if interest rates rise. The income funds listed here all have a modest positive correlation to 10-year Treasury yield, so they should do okay in a rising rate environment.
The average projected volatility for these five funds is 10% and the average correlation to 10-year Treasury yield is 32%. This level of risk and interest rate exposure corresponds to one of the model ETF portfolios on the 'efficient yield frontier.' This portfolio has a 10% projected volatility and a 30% correlation to the 10-year Treasury yield and a 5.5% yield. This portfolio also has a constraint that no more than 20% of the portfolio can be allocated to any single asset class.
|Name||Ticker||Yield||Expected Volatility||Trailing Volatility||Correlation to 10Yr Treasury Yield||Expense Ratio||Load|
|Guggenheim Multi-Asset Income||CVY||5.4%||12.7%||11.2%||34.7%||0.8%|
|Franklin Income Fund||FKINX||5.5%||10.2%||9.2%||38.5%||0.6%||5.5%|
|Thornburg Investment Income||TIBAX||5.2%||10.5%||9.8%||29.2%||1.2%||4.5%|
|JP Morgan Income Builder||JNBAX||4.5%||9.7%||9.0%||29.0%||0.7%||4.5%|
|BlackRock Multi-Asset Income||BAICX||4.4%||6.7%||6.2%||27.9%||0.8%||5.3%|
|4 ETF Model Portfolio||Model||5.2%||10.0%||7.4%||35.5%||0.6%|
The last entry in the table above is for a 4-ETF model portfolio, which has volatility levels consistent with the five funds, a yield of 5.2%, and a 35% correlation to the 10-year Treasury yield. The weighted expense ratio of the funds in the portfolio is 0.6%. The 4-ETF model portfolio is simply this:
|SPDR Barclays 1-3 Month T-Bill||BIL||2%|
|Vanguard Total Stock Market Index||VTI||10%|
|iShares S&P U.S. Preferred Stock||PFF||42%|
In summary, then, the risk levels and yields of the available multi-asset income portfolios all look quite reasonable and their positive correlations to changes in Treasury yields are exactly what one would want. The only downside to these funds is their high expenses when we include the loads. CVY is the exception, with a fairly reasonable 0.8%. It is notable, however, that CVY is a bit of an outlier here with regard to risk. The historical and projected volatility levels for CVY are much higher than the other funds and higher than the 4-ETF portfolio and this higher risk comes with only incrementally higher yield.
On the other hand, CVY has delivered substantially higher total returns than the other funds and the model portfolio:
|Name||Ticker||3yr Avg Annual Return|
|Guggenheim Multi-Asset Income||CVY||13.6%|
|Franklin Income Fund||FKINX||10.7%|
|Thornburg Investment Income||TIBAX||9.7%|
|JP Morgan Income Builder||JNBAX||8.6%|
|BlackRock Multi-Asset Income||BAICX||9.1%|
|4 ETF Model Portfolio||Model||7.8%|
CVY has a demonstrated ability to deliver higher price appreciation in a rising stock market which is compensation for its higher risk level. The question for investors is the degree to which they are comfortable with the higher volatility. When I run an unconstrained optimization for a risk level equal to CVY and with a 35% correlation to 10-year Treasury yield, I find that it is possible to achieve a 6.4% yield with the following allocation:
Please note that I am in no way suggesting that this portfolio would be appropriate for any specific person.
Despite the low yields on Treasury bonds, there remain income opportunities in other asset classes. As I have noted previously, there appears to be a decoupling between Treasury bonds and other fixed income classes, such that Treasury bonds are less and less representative of the opportunities. As I have shown, it is possible to create ETF portfolios with similar risk and interest rate exposure that have yields of 5.5% and above. For investors who prefer to buy a single fund, CVY meets many of these criteria. The other multi-asset income funds examined here provide an attractive yield for their risk levels, but their expense levels make them less attractive.
Disclosure: I am long PFF.