Using diversified income in a high inflation environment
The highly unusual combination of record low interest rates and higher inflation has created a ‘conundrum’ for income investors, which is forcing them to consider uncomfortable levels of risk.
This was the view of Matthew Lemke, fund manager with boutique investment house Prime Value Asset Management.
“Interest rates have fallen yet inflation has kicked up, which is very unusual historically. There have been very few periods in time where a blip in inflation has tracked so much higher than the RBA’s cash rate,” he said.
“How long this inflation blip lasts is up for debate. But in practical terms it means investors are being forced to allocate away from cash to other markets they are not used to or not comfortable with.”
Lemke said there was a degree of discomfort among many income investors about their exposure to riskier asset classes.
“The conundrum is: do investors sit there uncomfortable with their risk exposure, or do they do something about it?
“Low interest rates have spurred returns in equities and property, but there hasn’t been as many options for reliable income returns, which are essential for a diversified investment portfolio.”
He said diversified income portfolios offered an alternative to traditional term deposits, and complement listed shares and property trusts.
“A diversified income approach delivers a solid return at a relatively low risk. The performance is delivered to investors through the quality of assets in the fund, and the diversification of assets in the fund.
“Diversification is key to providing reliable returns. The last 12 months have shown the power of diversification, as we have seen a massive divergence among COVID-19 winners and losers in investment markets.”
Recommended for you
There is one specific risk that is a significantly higher concern for financial services directors compared to companies overall and is impacting their risk appetite, according to the AICD.
Global fund managers are shunning bonds, with the asset class seeing the largest drop in allocations in more than 20 years.
Australian Ethical has seen its funds under management reach $10 billion, driven by organic customer growth and superannuation contributions.
Financial advisers will have access to private equity investments run by WTW for the first time as it launches a pooled fund to provide savers with access to traditionally institutional assets.
