Karen
Investors are grappling with how to generate sustainable income in a challenging market environment. De-globalization and trade tensions are driving up inflation and instability, while geopolitical risks and high fiscal deficits are making economies more fragile.
At the same time, AI-driven growth has led to a narrow but powerful stock market surge. In this new market regime, we think a global multi-asset income approach offers an attractive way for investors to strike a balance between income, growth and diversification.
Fahd
Elevated valuations can sometimes be tempting for investors to buy higher-yielding assets. Our work shows that’s not the optimal way to invest. Because by doing so, you’re leaning into assets with lower quality, you’re buying assets that are illiquid, and you’re buying assets that may have really large drawdowns.
Karen
In equity markets, the story rhymes. Investors who reached for yield in high-dividend stocks suffered larger drawdowns in the COVID-related market crash of 2020 than those with a more balanced portfolio. That’s why we think a high-dividend strategy should focus on profitability and dividend sustainability. A moderate yield from a strong company or borrower may be better than a very high yield from a shaky one.
While bonds continue to provide important diversification, in a world of stickier inflation, we think investors need to look further afield. Stocks can be versatile enough to play many roles, including defense. Stocks with lower betas, including utilities and consumer staples, tend to be less sensitive to broad market swings in value. Quality equity strategies focused on stable earnings, and highly profitable companies can also play a role.
Fahd
Recently you’ve seen Treasuries and equities move in lockstep, but in a risk-off scenario where equities are lower, we do think Treasuries provide you that defensive quality. Also, Treasuries give you a coupon that’s higher than cash rates right now. You get that roll and carry, which provides you a solid source of income.
Karen
And if there’s one thing the markets have taught us over the last few years, it’s that the ability to adapt is crucial. Tactical asset allocation strategies that can monitor a portfolio’s overall volatility, including exposure to broad interest rates and equity movements, may help investors adjust exposures efficiently as market volatility or asset relationships change.
US equity markets today are dominated by growth companies that reinvest profits instead of distributing them to shareholders. This suggests that investors who concentrate equity exposure in dividend payers may miss out on important growth potential.
For example, today’s high-dividend universe is underweight technology and communications—two sectors that offer strong growth prospects. As a result, it’s likely to be underweight the US equity market and AI-driven growth. As we see it, these are trends that investors, even income-oriented ones, shouldn’t ignore.
Fahd
The typical multi-asset income approach of combining stocks and bonds may not work as well going forward. You’ve got to look for diversifying sources of income. Look at high yield, look at investment-grade corporates, look at emerging-market corporates, look at REITs, look at convertible bonds. And don’t overlook options. Option income, if extracted in a risk-controlled manner, is a very robust source of income.
Karen
We think multi-asset income investors today should remember four key pillars: look for efficient income, diversify your tools for defense, keep the growth engine running and expand your sources of yield.
Fahd
As we see it, the biggest advantage of leveraging a broader income universe is the ability to source yield from more places at the most opportune times. We like to think of it as a compass investors can use to navigate deglobalization, inflation and technological change.
Put differently, a thoughtfully constructed multi-asset portfolio has the potential to unlock a steady stream of income in an unsteady world.