How do you achieve 6% expected income in a low interest rate environment?
The low interest rate environment we have experienced for the most of the past decade has made it difficult for investors to generate income. It is not impossible to achieve a decent level of expected income from your portfolio; however, it appears that the days of being able to do so by investing only in U.S. Treasuries and Investment Grade Corporate Bonds are at an end, at least for now. One solution that we have found to be effective is to look at alternative income producing investments to achieve a higher expected yield while maintaining a similar level of investment risk.
A typical investor’s portfolio is comprised of mostly stocks and bonds – such as with the very common 60% stocks / 40% bonds mix. With the Barclays Aggregate Bond Index producing an expected yield of 2.5% and the S&P 500 having a current dividend yield of under 2%, this investment strategy is likely to produce very little income for a portfolio. Fortunately, there are other assets classes – non-correlated ones – that can be introduced into a portfolio to lower volatility in a client’s portfolio while providing a higher expected yield.
Tradition has developed such a strategy to provide our clients with a higher expected income despite the low interest rate environment. Positioned as a bond substitute, the Absolute Income Fund has the potential to improve a client’s income stream compared to a traditional bond portfolio while providing some protection in a down market. The Absolute Income Fund uses diversifying assets, including Infrastructure, Agricultural Land, Reinsurance, Alternative Lending, Timberland, Variance Risk Premium Harvesting, and investment Real Estate to increase the potential expected return, while higher degree of diversification lowers, but does not eliminate, a client’s exposure to risk. While the Barclays Aggregate Bond Index has an expected yield of 2.5%, Tradition’s Absolute Income Strategy is modeling an expected yield of 6.52%. Tradition believes it has created a fund to increase potential expected yield not just in the short run, but as long as interest rates remain unusually low.
DISCLAIMER: Tradition Capital Management, LLC. is an SEC (Securities and Exchange Commission) Registered Investment Adviser under the Federal Investment Advisers Act and provides portfolio management and related services for a fee. Nothing should be considered a solicitation to buy or an offer to sell shares of any security or service in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction. Investing in stocks and other risk assets could result in losses and positive returns are not guaranteed; at any given time, any asset class or asset may lose money and result in loss of principal value. Asset allocation and diversification may potentially mitigate some losses but does not ensure a profit nor fully protect against losses in declining markets. Inflation and liquidity risks are additional risks for financial assets. Diversification only reduces risk of capital loss but does not eliminate these risks. Past performance is no indication to future results, and all investments could lose value in the future.
Tradition does not make any assertions, estimates or guarantees about future results. The above is for illustrative purposes only to show possible return profiles of various asset classes and is not a depiction of historical returns nor is it a projection of future returns. This illustration is not GIPS compliant and is shown only for illustrative purposes. Absolute Income uses some investments that have limited liquidity and thus some of the investments are not able to be bought or sold on a daily basis or as needed. Expected Returns and Expected Yields are not forecasts nor guarantees, but are merely reasonable long term goals for strategies and asset classes and are used for modeling purposes. Actual results could vary materially from these Expected Returns and Yields and may provide positive or negative returns that may vary widely from these Expected Return and Expected Yield means (averages).
Comments are closed.