The increasing importance of finding reliable sources of income was borne out in a new survey of institutional investors in Europe and Asia.
The poll of 52 institutions – insurers, corporates and public pension funds – found that over half with an explicit income yield had failed to meet it in the past five years.
Asian institutions recorded an average 5% yield against a 5.2% target over the period, while European peers reported 3.4% against a 4.2% target. Expected yield over the next five years was 5.2% for Asia, against 4.2% for Europe.
The survey – which was carried out independently by Greenwich Associates in June and commissioned by Fidelity Worldwide Investment – found 75% of European and 65% of Asian institutions reported a decline in income yield.
What came across was that they are now turning to a greater range of assets to meet their income needs. Within traditional asset classes, there has been a shift towards investment-grade credit (developed and emerging markets), high-yield bonds and high-dividend equities.
In all, 56% of respondents expected to increase exposure to European and US investment-grade bonds over the next five years, while 44% of Asian respondents plan to raise allocation to EM investment-grade bonds.
Together with real estate investment and infrastructure, these are the asset classes considered to provide the best trade-off between income and risk to underlying principal.
Credit/sovereign risk in the search for higher investment income was cited most often as the key risk to the principal value of investments overall, although Asian institutions are most wary of equity market risk (44%).
Interest-rate risk also figured strongly, with Asian insurers singled out for having increased the duration of at least some of their fixed income investments to increase yield.
Newton, which is one of 16 boutiques owned by BNY Mellon, noted recently that the percentage of Asia Pacific ex-Japan stocks yielding above 3% in the FTSE All World Index had risen from 16.3% in 1995 to 28.6% in 2011. For Japan it had risen from 0.1% to 9% over the period.
The declines in +3% dividend stocks have come in the UK, which sank from 20.1% in 1995 to 7.3% last year, and North America, which fell from 29% to 17.5%.
The Greenwich survey found Asian institutions also expect to focus on local currency bonds on the understanding they offer higher yields, potential for currency appreciation and in some cases are perceived to be of lower risk than sovereign/credit bonds from developed markets.
“The search for income is already a powerful investment theme but it is one we expect to grow in importance over the next decade,” says Mark Talbot, managing director for Asia ex-Japan at Fidelity Worldwide Investment.
“We see clear evidence that institutions are considering a wider range of assets to meet their income needs. In this environment, flexible fixed income portfolios, quality-focused equity dividend portfolios and commercial real estate portfolios can offer greater yields without necessarily taking on significantly higher risk.”