Divergence: focus on consistent, diversified income
A more divergent world increases the potential benefits of taking a flexible and dynamic active approach to exploit the opportunities created by increased divergence and volatility across asset classes, regions and sectors. In this environment, where the path to returns may be rockier than it has been in the past, income’s potential to not only generate consistent income streams but also act as a driver of returns makes it an important component in today’s investment portfolios.
In fixed income, for example, credit investing approaches that seek to achieve consistent, diversified income can help to stabilise returns as cycles become shorter and more volatile, and accessing the full range of global credit sectors can help to provide income across different market environments.
High-quality fixed income has typically played a valuable role in diversifying investors’ portfolios, and current bond yields in most developed markets offer an opportunity for investors to move out of cash. This is an important consideration as staying in cash carries with it both reinvestment risk and duration risk. Reinvestment risk means if short-term interest rates drop quickly, cash investors are forced to reinvest at lower, less attractive rates. And duration risk is the risk that cash investors assume by keeping their investments in short-duration bonds. Falling interest rates typically lead to capital appreciation in longer-duration bonds, which cash investors would miss out on.
Pre-election ideas for investors: Lean into what you know (not what you don’t)
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Multiple authors