Aitken Ross

Generating an income in a low yield environment

Aitken Ross

This article was first published by Alliance Trust Investments on 7 December 2016.

Aitken Ross, Investment Manager, looks at how we could offer the perfect solution for savers and retirees looking to generate income in a low yield environment.

In an environment of extremely low global interest rates, government bond yields and corporate bond yields, it has become ever more challenging for savers and retirees to generate income. Whilst ultimately necessary, Central Bank actions of easing monetary policy through using tools such as Quantitative Easing (QE) and cutting interest rates close to zero has negatively impacted millions of citizens who rely on these rates to generate income. Savers and retirees now have to navigate the daunting prospect of trying to find an appropriate way of generating sustainable income in a low rate/yield environment.

The ATI Monthly Income Bond Fund (MIBF) is a potential solution in this low rate/yield environment. MIBF is a sterling denominated corporate bond fund that was designed to appeal to clients that have a preference for income. Since its launch in June 2010 the Fund has provided its investors with a consistently high annual income, paying an average of 6.0% per annum (Source: ATI, Oct 2016, gross of tax) despite the fact that Government yields have fallen from 3.50% to less than 1.25% over this period (Bloomberg, Oct 2016).

It is worth highlighting that this level of income hasn’t been achieved by increasingly higher levels of credit risk, as the Fund continues to invest in a portfolio of high quality corporate bonds. Moreover, an internal limit ensures that portfolio maintains a minimum average credit rating of A-, and the Fund has complied with this since inception in June 2010. In addition to a focus on high quality issuers, the Fund has also been consistently managed with significantly lower levels of interest rate risk than the majority of its competitors. Thus, on average the Fund has typically been positioned with interest rate risk of between half and two thirds of a standard corporate bond Fund.

Key Characteristics

MIBF

Sector

Relative

Distribution Yield**

5.8%

3.1%

86% higher

Credit Quality*

A

BBB

Higher Quality

Int Rate Risk*

4.2

8.2

-49% less

 

*Sector Int rate risk based on ML £ Corps

** Sector Distribution Yld: IA £ Corporate Bond sector

When compared to other Funds that have similar levels of interest rate risk, MIBF has consistently delivered significantly higher level of income to its investors throughout as well as vastly superior total returns.

Measure

Cumulative

Annualised

Total return (net of expenses)

54.40%

7.04%

Capital Return

6.90%

1.05%

Income Return

47.50%

5.99%

Volatity

-

4.82%

 

Source: Bloomberg, Oct 2016

Key characteristics:

Sector leading levels of income delivered monthly to clients

Currently MIBF is generating an income yield of c.5.8% as at Oct-2016. According to data by Financial Express (FE) this is the highest distribution in the IA £ Corporate Bond sector. We distribute to clients the income that is earned over the period. This is in contrast to peers that depress income by taking charges from the income that is generated. MIBF takes these charges from capital thereby enhancing distributable income.

With lower levels of credit risk

MIBF targets high levels of credit quality within its portfolio and currently has a “A” credit rating. Achieving high levels of income in the current low rate environment could be made easier by sacrificing the quality of assets within the portfolio. We do not believe that we should expose clients to high levels of credit risk to achieve their income targets. Strong stock selection coupled with strong levels of liquidity in the Fund allows MIBF to target specific corporate bonds that deliver on the Funds objectives without sacrificing on quality.

And lower levels of Interest rate risk

With Government bond yields in the UK near record lows we believe the risk/return is skewed significantly to the downside. In other words we believe that you are not compensated for the interest rate risk taken within traditional bond Fund. The Fund therefore is currently managed with nearly half the interest rate risk of the £ corporate bond index. This will protect clients when the interest rates begin to normalise and values ultimately fall. We are able to reduce the interest rate risk whilst still maintaining the market leading income delivery to clients.

Lower levels of ESG exposure

Whilst delivering the above characteristics of the Fund, MIBF also scores better than the sector in terms of ESG exposures whilst also being 50% less carbon intensive than the wider sector.
In summary, by making use of strong levels of expertise, an innovative mandate, strong levels of market liquidity, the ATI Monthly Income Bond Funds is able to deliver a market leading distribution yield to clients with superior levels of credit quality and lower levels of both credit and interest risk.

 

For a comprehensive list of common financial words and terms, see our glossary here.

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Sustainable Future Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. The Monthly Income Bond Fund has a Distribution Yield which is higher than the Underlying Yield because the fund distributes coupon income and the fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining the fund’s capital appreciation. The Distribution Yield and the Underlying Yield is the same for the SF Corporate Bond Fund.

Disclaimer

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.
Wednesday, December 7, 2016, 12:00 AM