Within our asset allocation, we continue to invest in income bearing assets, not only for the income provided, but also for the long-term growth opportunities. The changing macro-economic conditions within global markets have led to a positive outlook for these types of assets.

During the past decade, income generation was not as favourable as it had been. With the global economy being extremely skewed to growth and the prospects for growth investing so positive, many income bearing assets became even more out of favour as time progressed. Since the COVID 19 pandemic, there has been a material shift in global economic conditions which has led to a renewed focus on dividends and income that many investors continue to ignore.

Opportunities in fixed income

For the first time in several years, fixed income assets are now providing investors with both income and capital growth opportunities. As interest rates have risen, bond yields have had to rise in line with this and are now providing greater income for investors.

All yields have risen from their lows. For long term investors, this is excellent, as the diversification benefits of holding bonds is coming to the fore again. Having a higher yield can help provide a steady income, especially in more volatile times. From the selloff that has been witnessed in bonds during 2022, there is also the bonus that capital values are generally under par levels, meaning there is the opportunity for capital growth alongside the higher yields on offer. With corporate bonds yielding close to 7% and with prices still under par, the return opportunities for these types of investments are far better now than they have been for several years.

There are still risks to fixed income as further interest rate hikes are priced in and inflation is still persistently high, meaning the real return for some bonds is still negative. There could also be the risks of defaults and a rise in distressed debt if the global economy moves into recession. The team here at MAIA continue to prefer corporate debt over government debt as we think the longer-term opportunities for corporate credit are more positive. Corporates do seem to be in a better position than they have been in the past during this part of the economic cycle, as they have higher cash levels to compensate higher yields, there are low default rates predicted and lower refinancing levels are present. All providing lower risks for investors.

Opportunities in equities

The market seems to be waking up to the fact that equity valuations cannot continually increase when interest rates are rising, inflation is high, and growth is slowing. This has led to growth style stocks underperforming value style stocks. As our equity allocation continues to favour value as a style, this has benefitted our portfolios recently.

If the market is correct and growth continues to slow, for many companies, this will provide a weaker backdrop and could lead to tougher trading conditions. In this type of scenario quality businesses and companies that deliver solid income to shareholders due to positive cashflow metrics and lower debt, tend to outperform.

We are focusing on these characteristics for our income biased equity holdings. Many of the funds we are investing in within this area are higher quality, have solid underlying fundamentals, lower valuations, and the discipline of providing dividend growth and increasing income to shareholders. We believe investing in these stocks, along with our more generic value tilt, provides a good opportunity to outperform over time.

Dividend paying stocks have generally been ignored post COVID, as many had to cut their dividends in 2020 as global economies were shut. Some companies were forced to cut their dividends, whereas others thought it was prudent to do so as the outlook was so uncertain. What we have seen over the last couple of years, however, is that dividend pay-outs are moving back to pre-2020 levels or even higher as the outlook is far clearer and companies continue to sit on higher cash reserves.

The team are investing in income and dividend stocks globally as well as within the UK. The UK has a higher dividend level due to the stocks that reside in the index as well as the greater focus on dividends that is inherent in the UK market.

Across all equity regions income is an important consideration for our holdings and will continue to be so moving forward.

Opportunities in alternatives

The infrastructure holdings we invest in are linked to underlying assets that will generate an income based on an output underpinned by regulation or long-term contracts. The income generated for many assets is linked to the Retail Price Index (which monitors the monthly change in prices of goods and services used by most households), which provides inflation proofing, as well as a growing income stream over time.

Holding infrastructure as an asset helps to reduce risk in the portfolio by increasing diversification due to the asset’s lower correlations to other asset classes. Due to the wide spectrum of assets within the infrastructure theme, the asset can also work in both growth and value driven markets.

Income generation is stable, providing investors with a clear understanding of what will be returned over time. With the tailwinds of energy efficiency, increased fiscal spending and net zero targets, the asset class is providing long term investors positive opportunities for the future.

In conclusion

The investment team are pleased that the opportunity for investing in income assets is continuing to improve and more importantly is being ignored by many other investors. Income provides a great addition to an investor’s portfolio. It can help provide a stable return over time, reduce risks and decrease correlations between asset classes.