Even as US Treasury real yields hit lows and global stock markets reached yet another record high on Monday (September 6), institutional investors are taking on new income investing approaches to maximise returns.
The MSCI World Index reached 3169.644 on Monday, marking another record high and its eighth consecutive day of gains. Meanwhile, US Treasury real yields continue to track in negative territory, with 10-year real yields at -1.01% on Tuesday (September 7).
While institutional investors around the world have started shifting allocation away from fixed income and towards higher-yielding asset classes such as equity and private markets, some are thinking up fresh ways to find yield to cater to their conservative customers.
Industry superannuation fund Cbus, for one, is looking to introduce a new “enhanced income” asset class for their conservative option that will offer a bit more income over cash, Leanne Taylor, head of portfolio construction at Cbus, revealed at the Australian Institute of Superannuation Trustees (AIST) conference last week.
The option would consist of highly liquid securities without a duration risk, she said.
Taylor added that Cbus’s fixed income exposure is mostly in sovereign bonds, and that a quarter of its portfolio is in unlisted assets, which provides diversification and stability during times of market stress. In addition, the fund uses currencies and option strategies to boost defensiveness.
“In periods of market stress, we tend to see the Aussie dollar fall, so it does provide a defensive lever. Similarly, we're looking at foreign currency exposure as well to [see which] peers may provide more defensiveness than others,” she said.
“Option strategies are increasingly a tool that we have been looking at and exploiting, particularly when there are some market pricings we can take advantage of and add protection in our portfolio,” she added.
At the same time, the fund has lowered its real return objectives to be “more realistic than where we were a few years ago, given the adjustments in some of the asset markets.”
“We believe that’s a more prudent approach than increasing the risk within the portfolio,” she explained. “If you have a conservative portfolio, then I think it's prudent to remain true to label.”
Similarly, State Super launched a new income sector in May to its liquid defensive portfolio that will focus on corporate and structured credit that has low duration and high liquidity, with an objective of achieving a 2% higher return than cash.
“To achieve this, we will have core allocations in Australian investment-grade corporate credit and global investment-grade structured credit,” chief investment officer Charles Wu said in a statement in May. “Our strategic allocation to the new income sector will vary between our investment strategy options, ranging from 2% in our growth strategy up to 18% in our conservative strategy.”
AGAINST THE GRAIN
In July, various superannuation funds told AsianInvestor that they remained overweight in equities amid the stock market rally. However, T Rowe Price's multi-asset team has the opposite outlook.
The fund's multi-asset portfolio is modestly underweight in equity and modestly overweight in bonds and cash because of the unattractive risk-reward profile for equities after the rebound from last March’s drop in share prices, multi-asset solutions strategist Wenting Shen told AsianInvestor.
“So in our view, some of the tailwinds for stocks such as the accommodative monetary and fiscal policies may have peaked already, which could temper the potential for equity returns going forward,” she said.
“We expect the 10-year yield to reach 2% by the end of the year. And that could become more challenging for stocks and long-duration assets. From that perspective, we think that keeping certain cash in the portfolio can offer some dry powder if there is a snapback when the sentiment resets.”
Shen also acknowledges that the team's view is contrary to many asset managers’ perspectives, but explains that valuations are among its key considerations.
“Both asset classes have valuations that are quite overstretched, but from a risk-return perspective, bonds are slightly more attractive. On the other hand, we are conscious that the economic backdrop is still quite strong, so our current position is to take profit, manage our risk, and also pick the best spot to play the recovery,” she said.
Within the fixed income space, the team is looking at short-duration, long credit positions. It is underweight on government bonds because they are challenging as a diversifier for equity risk.
The portfolio has also pivoted below investment grade exposures into floating rate loans, citing more attractive relative valuations, higher standing in the capital structure, and shorter-duration profiles as factors.
Emerging market bond valuations and yields also currently look attractive, particularly local currency bonds. “Emerging market currencies are still relatively cheap,” Shen said.
This article has been updated to clarify that Shen's views reflect the multi-asset team's approach.