Global Head of Fixed Income Jim Cielinski and Alex Crooke, Co-Head of Equities - EMEA and Asia Pacific, discuss why a straightforward income strategy may make sense for investors now.
- As more income can mean more risk, investors should consider a risk-adjusted approach to income investing.
- Rather than focus on maximizing yield, investors should consider strategies that look at other ways of producing or generating returns with an approach that seeks to protect on the downside.
- Global equity income dividend-paying stocks may present opportunities, including diversifying risk through different currencies and growth outlooks in different sectors.
Jim Cielinski: I think there are many reasons to be optimistic about high-yielding fixed income. When we look at the economy, it's humming along. Defaults are low, likely to stay low, and investors still need yield. Even if rates go up a bit, yields are still low. It's a solution that high-yielding securities provide. I think it's in demand for a long time.
Some of the concerns, I think, would first of all be the debt load. There is a lot of debt in the world and the ability to pay that off therefore is key. We should also keep in mind that an additional concern might be that things around liquidity are not getting better. You see that in the QE unwind in Europe. You see it in the Fed, for example, in raising rates in the U.S. And whenever things change in the market, markets respond to change, and that is a cause for potential concern.
When I think of how to best capture yield today, but by being aware of those concerns, it's really about remembering more is not always better. And in the case of income and yield, that's where we are today. More yield typically means more risk. And today, I'll look at diversification of risk. I don't just want to maximize yield, I want strategies that might look at other ways of producing or generating returns. I want a good risk-aware approach. And I really want teams that can look across an array of different signposts and predictors and be good about predicting when those periods of volatility might erupt.
When I think of how to best take advantage of high-yielding strategies, but at the same time, be aware of those concerns it comes down, I think, to a simple transparent strategy that offers diversification. There are a lot of opportunities to produce returns. More is not always better in the case of income. More income can mean more risk, and I think a good risk-adjusted approach is better.
Alex Crooke: I think the opportunity for global equity income dividend-paying stocks is still very large. Again, the interest rates are still very low around the world and so the opportunity to find dividend yields of 3%, 4%, 5% from companies is still very attractive, particularly when you have the potential for capital growth in holding those investments over time, so I think there's still a lot of opportunities there. There are also opportunities globally to diversify risk through different currencies, different growth outlooks in different sectors.
So again, a warm market where you maybe find there aren't many technology ideas, if you go to Asia you can find very good yielding technology ideas in markets like Taiwan and Korea. So I think it's the diversification, the opportunity for a high yield and the potential for capital growth that really excite us.
Foreign securities are subject to currency fluctuations, political and economic uncertainty, increased volatility and lower liquidity, all of which are magnified in emerging markets. Fixed income securities are subject to interest rate, inflation, credit and default risk. As interest rates rise, bond prices usually fall, and vice versa.
High-yield or "junk" bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
Quantitative Easing (QE) is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market
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