Is there a simpler way to invest for income in portfolios?
The knee-jerk reaction is to look for yield in fixed income, according to Adam Hetts, vice president and head of portfolio construction services at Janus Henderson Investors.
But there may be an easier way.
“What we’re seeing generally is reaching for yield way too far in the fixed income portion of the portfolio, and taking what we see as too much risk in most fixed income allocations,” Hetts said.
In a recent meeting with ThinkAdvisor, Hetts discussed the findings of some new research about how income investing can be simplified.
“Income has not been easy since the global financial crisis and since interest rates hit historical lows globally and are still floating around historical lows,” Hetts said. “People still want income; especially a lot of advisor clients just want income.”
These clients want yield for day-to-day needs and for emotional safety in case there’s a downturn in the market, Hetts explained.
The problem is that increased innovation and a proliferation of new income investment solutions that have created too much complexity and risk in portfolios.
“A lot of new products being built are getting increasingly complex with leverage, with derivatives, with global strategies, [and] more esoteric asset classes,” Hetts said. “Our view is that they’ve worked — obviously. There have been rainbows and sunshine across a lot of the higher yielding income asset classes. We’re a little more concerned with what happens when the tide goes out.”
As the research paper — “Income Investing Simplified” — written by Hetts and his team, states, income innovation has been welcome in this world of historically low global interest rates. However, the paper also states that “many of these new solutions are stretching the risk boundaries of traditional income asset classes by utilizing increasingly complex and esoteric instruments.”
The paper points to Morningstar data showing that 19% of U.S. large blend funds, 21% of intermediate-term bond funds, 28% of multisector bond funds and 47% of nontraditional bond funds were launched within the last five years.