Active approach to income investing

Investment income provides many benefits – including guarding against inflation and geopolitical crisis – but today’s “safe” bonds may offer no or ultra-low returns. Many of these risks will ebb and flow over time, and they are often binary: they either happen or they don’t happen. As a result, they can be difficult to hedge or invest around.

A less discussed danger is that these concerns could prevent investors from pursuing their long-term goals or deter them from taking sufficient risk in their portfolios. On the contrary, investors who “hunt for income” using riskier asset classes may be able to fight off inflation, stabilise returns and reduce overall portfolio volatility.

An active approach to income investing can help investors search for opportunities and manage a broad range of risks.

Investment Theme
Neil Dwane, Global Strategist, talks about what is "hunt for income".
Why income is important?
Inflation can be a stealth threat
Even small amounts of inflation can significantly erode purchasing power over time.
An annual 2% inflation rate can reduce the value of an asset by nearly
0 %
in just 10 years1
0 %
in just 10 years1
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Some living costs even far beyond inflation
In many parts of the world, health-care expenses, education costs and real estate are climbing faster than the official 2% inflation target of most major central banks.1
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Global home price
appreciated by
0 %
in just 5 years2
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0 %
in just 5 years2
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Home prices in HK are even more than triple since 20092
Stock prices more volatile in late cycle and not easy for investors to fight inflations
Stock markets have suffered wild swings as reflected by vix. Higher volatility and dispersion of investment outcomes could be expected in late cycle. 2018 was the first year posted negative returns across major stock markets since 20083.
Slowing growth not supportive for earnings and share prices
Slowing growth is widely expected for long run, which is not supportive for corporates to generate earnings backing elevated valuation of stock prices.
Slowing long term (6-10y) real GDP growth consensus 4 AllianzGI
Political uncertainty also makes markets more vulnerable, such as US-China trade war, US-EU trade dispute, Brexit...
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That is why hunt for income
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A relatively steady income stream
can be more tangible helping to stabilize returns and make them more predictable.
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The historically lower risk profile
associated with income-generating investments might help reduce portfolio volatility in times of market and economic stress.
Global Stock Market and Global Bond Market Annual Performance5
Tangible income streams could combat inflations and help navigate high uncertainty such as Tech Bubble in 2000, Financial Crisis in 2008, Fed Tapering in 2013, EM crisis in 2015, Trade War & Fed Tightening in 2018.
What difficulties do we face in an income world?
Not much gain but more pain
Yields on traditional high yielding credits, such as high yield and EM bonds, are not high anymore. Government bonds (the safest kind of income-generating securities) are even minus.
Hard to find high yielding6
What do credit risks rising in late cycles mean?
You are exposed to more credit risks for every single dollar you received from coupons
Credit spreads on top of government bond yields tend to widen because of rising credit risks in late cycle which could result in credit default without interests and principles return to bond holders.
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Credit spreads tend to widen in late cycle6
Annual returns6
Global High Yield EM Sovereigns Global Investment Grade
2018 -3.3% -4.6% -3.5%
2017 10.2% 13.0% 9.3%
2016 14.8% 8.4% 4.3%
2015 -4.2% -3.4% -3.8%
2014 -0.1% 0.3% 3.2%
Lower for longer on bond yields mean shortfalls for income
Fed, PBOC, ECB, BOJ have all made U-turns to dovish tone in monetary policy trying to prolong the business cycle and lent a big hand to financial markets. But government bond yields known as safest income could be depressed at ultra-low level or even minus for an extended period, just like Japan’s lost decades.
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Total market value of negative-yielding debt has piled up
0
Trillion
USD7
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Income hunting should be highly active and selective
AllianzGI Active management is the answer to enhance income at measured risks
Income can be found throughout the capital structure. With lower beta returns (what the broad market provides) likely for the next 10 years, investors need to diversify across asset classes to help capture opportunities. Active management helps us assess potential risks and returns.
Active strategies to deliver
“More gain and less pain”?
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Multi-asset supplement with “Stronger Income”
US high yield bonds mixed with US stocks and convertibles could capture proven long term growth and asymmetric risk-return profile.
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High yielding variations with “Stronger Income”
Asian bonds as a sub-sector of EM bonds with higher income and better credit ratings.
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Short duration to deliver “Better Income”
Good quality focus and rigorous credit research on short durations HY results in consistent income, while maintaining capital.
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Multi-asset credit optimizing “Better Income”
Multi-asset credit could optimize a good quality portfolio with less credit risks and interest rate risks.
Hunt for Active Income targeting more gain but less pain6
AllianzGI fixed income AuM8
0
Billion
in 2012
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0
Billion
in 2019 Q1
Other than fixed income, the AUM in one of our income flagships, multi-assets based strategy increased to $37.1 billion
0
Times
jump since 2013
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Active is: Hunting for income

Source:

1.
Allianz Global Investors. May 2019
2.
UBS; September 2018
3.
Allianz Global Investors, Reuters; June 2019
4.
Goldman Sachs; June 2019
5.
Reuters, BofA Merrill Lynch; “Index used MSCI World Index and BofA Merrill Lynch Global Corporate Index”; June 2019
6.
Allianz Global Investors, Reuters; June 2019
  • Global High Yield = The BofA Merrill Lynch Global High Yield Index (HW00)
  • EM Sovereigns = The BofA Merrill Lynch Global Emerging Markets Sovereign Plus Index (IP00)
  • Global Investment Grade = The BofA Merrill Lynch Global Corporate Index (G0BC)
  • US 10-Yr Treasury = US 10 year Treasury Note
  • DE 10-Yr Bond = German 10 year Bund
  • Global Multi-asset credit represents Allianz Global Multi-Asset Credit strategy
  • US Short duration HY represents Allianz US Short Duration High Income strategy
  • Asian High Yield represents Allianz Dynamic Asian High Yield Bond strategy
  • US Mixed Assets represents Allianz Income and Growth strategy
  • Global Bonds = The BofA Merrill Lynch Global Government Index (W0G1)
7.
Bloomberg; June 2019
8.
Allianz Global Investors; “Fixed Income AuM of EUR 187bn includes money market, excludes fixed income sleeves in Multi Asset portfolios”; 31 March 2019
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