Generating income from investments has become increasingly tricky.
On one hand, bank interest rates have fallen to levels where they cannot keep pace with inflation. On the other hand, investing in stocks and properties is now riskier compared to the period before Covid-19, as much of the world is in recession.
This has put investors in a quandary as they seek to find a sweet spot that will allow them to earn some income while potentially benefitting from a recovery in the financial markets.
One solution for investors facing this dilemma is to consider investing in mutual funds that make regular payments to unit holders. Widely known as income funds, these funds invest in bonds, other interest-bearing securities, real estate investment trusts (REITs) and stocks that pay relatively high dividends.
These different asset classes can potentially provide yields that are higher than what U.S. treasuries offer, as seen from the table below.
Income funds tend to be safer and less volatile than growth funds, thanks to the buffer provided by the dividends and interest payments they receive from the underlying investments.
As seen from the table, asset classes such as Asia-Pacific REITs and preferred securities provided yields of more than 4.50 per cent per annum, while Asian high-yield bonds provided a yield of 7.36 per cent per annum.
In contrast, growth funds tend to rely heavily on capital appreciation to generate returns for investors. This makes growth funds potentially more vulnerable when financial markets turn bearish.
Asian investment grade bonds
For investors with a lower risk appetite, the Manulife Asia Pacific Investment Grade Bond Fund potentially provides a high level of income certainty as at least 95 per cent of the portfolio comprises investment-grade bonds. The fund aims to maximise total returns from a combination of capital appreciation and income generation.
As of June 30, 2020, the fund held bonds with an average coupon of 4.06 per cent per annum and a yield to maturity of 3.69 per cent per annum — significantly higher than the average interest rate of 0.52 per cent per annum on 12-month fixed deposits in Singapore2.
Other income-generating bond funds managed by Manulife Investment Management include the Manulife SGD Income Fund, where the foreign currency exposure is hedged back to Singapore dollars, and the Manulife Asian High Yield Fund3. These funds hold a larger proportion of high-yield bonds (compared to Manulife Asia Pacific Investment Grade Bond Fund), which offer potentially higher returns but are of lower credit quality compared to investment-grade bonds.
Mr Murray Collis, head of fixed income, Singapore and deputy chief investment officer for fixed income in Asia (ex-Japan) at Manulife Investment Management, notes that Asian bonds typically offer higher yields than similarly rated bonds from issuers in the developed world, notwithstanding the region’s faster economic growth rates and stronger fiscal positions.
He acknowledges that Asia is perceived to have higher investment risk than Europe or North America, due to the lack of coverage and weaker corporate governance in some markets, but he added that this can be mitigated with top quality research carried out by analysts with local knowledge.
“Our extensive on-the-ground proprietary research provides us with an informational advantage over peers,” he says.
Preferred Securities, a fixed income hybrid, and Asia Pacific REITs
As for income investors with a slightly higher risk appetite, they can consider funds that invest in asset classes beyond bonds, such as the Manulife Preferred Securities Income Fund4 and the Manulife Asia Pacific REIT Fund5.
Preferred securities are typically issued by large and highly regulated entities with high stable cash flows such as banks and utility companies. These securities generally offer higher yields than bonds from the same issuer, as the bond holders will be paid first should the entities run into financial difficulties.
As for regional REITs, Ms Ng Hui Min, portfolio manager, Asia Pacific REITs at Manulife Investment Management, says that while there is still a lot of uncertainty, the Covid-19 situation has been contained in most Asian economies, and any resurgence is likely to see more targeted policy responses, rather than broad-based lockdowns. Asia Pacific REITs are also in a stronger position to face an economic downturn now compared with during the 2008 Global Financial Crisis.
“The key tailwind for the rest of the year will be lower-for-longer interest rates, with the U.S. Federal Reserve signalling no interest rate hike until 2022,” she says.
“The yield spread between REITs and government bonds have widened compared to last December, meaning investors are being compensated more for assuming risk,” she adds.
For more information about Manulife Investment Management’s suite of income funds, please visit income.manulifeam.com.sg.
1 Asian high-yield bonds are represented by JPMorgan Asian Non-Investment Grade Credit Index; US high-yield bonds by ICE BofAML US High Yield Index; global high yield corporate bonds by Bloomberg Barclays Global High Yield Total Return Index; preferred securities by ICE BofAML US All Capital Securities Index; Asia-Pacific REITs by FTSE EPRA/NAREIT Asia ex Japan REITs Index; Asian investment grade corporate bonds by JPMorgan Asian Investment Grade Corporate Index; US corporate bonds by ICE BofAML US Corporate Index; global REITs by FTSE EPRA/NAREIT Global REIT TR Index; global equities by MSCI World Index; global investment grade corporate bonds by Bloomberg Barclays Global Aggregate Corporate Total Return Index; US treasuries by ICE BofAML US Treasury & Agency Index.
2 Source: https://secure.mas.gov.sg/msb/InterestRatesOfBanksAndFinanceCompanies.aspx
3 The full name of the fund is Manulife Global Fund – Asian High Yield Fund
4 The full name of the fund is Manulife Global Fund – Preferred Securities Income Fund
5 The full name of the fund is Manulife Global Fund – Manulife Asia Pacific REIT Fund
The source for all opinions and information shown in this article is Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration Number: 200709952G) (“Manulife”), unless otherwise stated. The Manager of the Manulife Asia Pacific Investment Grade Bond Fund and the Manulife SGD Income Fund is Manulife. Manulife Global Fund is an investment company registered in the Grand Duchy of Luxembourg. The information provided herein does not constitute financial advice, an offer or recommendation with respect to the funds referred herein. Investments in the funds are not deposits in, guaranteed or insured by Manulife or Manulife Global Fund and involve risks. Distributions are not guaranteed. The value of units in the funds and any income accruing to them may fall or rise. Investors should read the Singapore prospectus, and seek advice from a financial adviser before deciding whether to purchase units in the funds. A copy of the Singapore prospectus and the product highlights sheet can be obtained from Manulife or its distributors. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the funds are suitable for him. Opinions, forecasts and estimates on the economy, financial markets or economic trends of the markets mentioned are not necessary indicative of the future or likely performance of the funds. The funds may use financial derivative instruments for efficient portfolio management and/or hedging. This advertisement has not been reviewed by the Monetary Authority of Singapore.