Invesco: The dilemmas associated with traditional income-oriented assets

Article | 30 September 2020 | Georgina Taylor, Fund Manager, Henley Multi Asset team

Further information: View the Fund factsheets Invesco Global Targeted Income Fund (UK)

Historically, equity dividends and fixed income coupons have been an incredibly important component of income investing. However, current macroeconomic forces mean that both are under pressure. Fixed income yields are low and dividends have been, or are, at risk of being cut.

Income investors may need to alter their investment strategy and consider alternative cash flow streams to ensure their level of income is not diminished going forward and, importantly, that they do not take an excessive level of risk with their underlying capital.

As an example, Figure 1 highlights that investors need to take increasing levels of risk to generate similar levels of income versus cash rates historically. The chart shows the full fixed income universe relative to its size and yield.

The left-hand side of the chart shows the limited options now available within fixed income that are yielding in excess of 3%. There are certainly options available across emerging markets and high yield bonds, but investors just need to be aware of the capital risks associated with those investments should they require access to their capital at any time.

Dividends have also been a great source of income for investors historically. While dividends are not disappearing, they have been cut as a result of the recent crisis. Dividends will always be helpful but, as we have seen, they are not guaranteed and, of course, equity investments also come with capital risk.

Figure 2 shows the 2021 dividend futures contracts for the UK and Europe. In the same way that equity index futures reflect future expectations of the level of the equity index, dividend futures reflect the market’s expectation for the level of dividend payouts for the index as a whole, expressed in index points.

Dividends have been cut around 30% this year in Europe and, even in Australia, where dividends have been deemed to be more protected, there have been headline dividend cuts this year.

This does not mean income investors should remove equity and bond exposure from their portfolios, as equities and bonds will always offer some form of income for investors. However, given the macro backdrop, income investors cannot ignore the potential capital risk that comes with these asset class investments. Arguably, these single asset class risks put multi asset funds in focus.

If income investors can gain exposure to unconstrained multi asset income strategies they can efficiently and effectively complement these asset class holdings and diversify their income stream. A multi asset strategy that also has an explicit risk target is an attractive addition to an income portfolio, in order to help manage volatility and potentially preserve capital.

To read the full article series on multi asset income investing, please visit  the Invesco website.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.

The fund makes significant use of financial derivatives (complex instruments) which will result in the fund being leveraged and may result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment.

The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Manager, through the use of collateral management.

The securities that the fund invests in may not always make interest and other payments nor is the solvency of the issuers guaranteed.  Market conditions, such as a decrease in market liquidity for the securities in which the Fund invests, may mean that the Fund may not be able to sell those securities at their true value.  These risks increase where the Fund invests in high yield or lower credit quality bonds.

As one of the key objectives of the fund is to provide income, the ongoing charge is taken from capital rather than income. This can erode capital and reduce the potential for capital growth.

Although the Fund invests mainly in established markets, it can invest in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise.

Important information

All data is as at 9 September 2020 and sourced from Invesco unless otherwise stated.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown.

Georgina Taylor

Fund Manager