Building robust income generation portfolios
From a multi asset perspective, it is best to diversify sources of returns and income generation across a broad range of asset classes.
“This can allow us to build robust portfolios that may benefit from medium-term asset appreciation but are also able to withstand unforeseen economic shocks,” says Amato.
We believe dividend growth can be a winning strategy due to the benefits of compounding, while the current environment is also conducive to finding optimal value in fixed income.
Valuation and behavioural analysis play a key role in identifying possible opportunities across markets and geographies. Looking at the fundamentals helps situate where we are in the playing field. “You need to be dynamic to respond to changes in markets,” Amato points out.
By implementing a robust cross-asset valuation framework, diligent asset managers may identify ‘fair value’ for a wide range of assets across the world, in light of historical expected returns, economic theories, and investor preferences for each asset class.
“We look for long opportunities in markets that we believe are cheap and exhibiting signs of emotional selling such as investor capitulation, forced selling, or deleveraging,” explains Amato. “We also limit or avoid exposure to assets that we think are expensive and where sentiment is extended or complacent to growing risks.”
The polarised nature of the market means attractive prospects may be found across a wide range of sectors such as utilities, healthcare, and consumer staples in both developed and emerging economies. Taking a flexible approach, whereby the exposure to different asset classes is adjusted according to their relative attractiveness, can be a determining factor in a saturated market.
By investing in a well-diversified blend of assets expected to deliver a sufficient level of income, such as dividend-paying shares, interest-bearing fixed income instruments and property, it may be possible to grow both income and capital without sacrificing one’s capital.
According to Amato, long-dated government bonds are attractive at present, with the potential for interesting yields along with portfolio insurance properties.
Even so, there is a need to be wary of the risk of complacency. “The equities rally was very narrow. A lot of the appreciation came from a small number of companies – Big Tech and AI – which have a very large weight in indices,” reflects Amato. “But now the narrative is changing. Now there are credible objections: this is the tech, but where is the killer app? How are we going to make money?”
There is also the possibility that inflation may prove more stubborn than markets expect, in which case there would be a need for repricing. Broadening the search for income, focusing on the most attractive total return opportunities and then optimising exposures across different sources of income provides the stability needed to stand the test of time.
