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SINGAPORE (Feb 21): These days, reliable income is hard to come by.
Income is a top objective for most investors and it is the main outcome they want to achieve when investing.
After the Global Financial Crisis (GFC), relying on “old-school” savings products, such as depositing money in a savings account or purchasing government bonds, as a sole source of income came to an end.
Plummeting growth and the drying up of credit forced the hand of central banks. Interest rates were cut to record lows in an attempt to encourage banks to lend and restart the economy.
Since the GFC, the global economy has been recovering and interest rates are increasing in many countries, led by US.
According to Rupert Rucker, head of income solutions at Schroders, Central bank balance sheets swollen by QE (Quantitative Easing) will also see a reduction in the near future. Central banks will reduce reinvestment of the proceeds of maturing debt securities, and begin tapering bond purchases. Subsequently, bank savings may become more appealing again as rates rise, as will government bonds as yields begin climbing.
But the increase in interest rates are gradual, which means rates will remain exceptionally low by recent historical standards.
More significantly, investors waiting for a return to the “‘normality’” of high base rates and bond yields are likely to be disappointed.
And given structural changes such as demographics and productivity, Rucker believes that rates are unlikely to return to levels that would generate enough income for investors relying on just cash savings.
“Since interest rates and bond yields move in the same direction, we think bond yields are also unlikely to reach levels seen between 1970 and 2008. It is therefore improbable that yields will entice investors back towards government bonds as a sole source of income,” says Rucker.
However, demand for income has not gone away.
According to the 2016 Schroders Global Investor Study, 87% of investors are seeking an income of at least 4% in order to compensate for inflation. A smaller but still large proportion is looking to achieve even greater returns.
However, most people overestimate what their current investments can provide, says Rucker. And with bank savings rate at record lows, people need expert help to obtain higher income reliably from other sources.
So what can asset managers do for investors?
Rucker says that investors should start casting their nets wider into riskier asset classes for higher income, such as equities, corporate bonds, property, and multi-asset solutions.
However, not everyone would be familiar with these assets and might find it difficult to manage them, especially when they come with lots of different risks.
An asset manager would come in offering solutions that allow investors to access these higher income-generating assets, while at the same time helping to manage the risks involved.
The most important part of managing risk, however, is taking a long-term view.
Investors seeking higher levels of income will need to be prepared for short-term changes in the value of their capital if they are to access higher sustainable returns in the long-run.
This is in contrast to cash deposits which are often guaranteed up to a certain value. But that is not risk-free either as the value is being eroded by inflation.