Finding Income Alternatives

Find Alternatives For Income

With traditional bonds yields close to zero, investors are challenged to find the right strategic allocation between assets classes to deliver required returns and generate income. The need for stable domestic core fixed income has not necessarily diminished. However, to combat ultra low yields, combining traditional bonds with alternative sources of yield can help investors generate a more suitable risk/return profile.

Generating Yield Continues to Be a Challenge

Source: Bloomberg from December 31, 2004 to September 30, 2020 in local currencies.

Taking an Active Approach to Fixed Income

Focusing on domestic bonds can be a good strategy for certain investors. However, in order to increase yield potential and combat volatility, an active, diversified approach to fixed income, that incorporates a range of fixed income securities, is increasingly necessary to mitigate risk and increase risk-adjusted returns.

2019 2018 2017 2016 2015
Global Conv. Bonds
13.66%
Canadian Gov't Bonds
1.53%
Global Conv. Bonds
16.06%
Global HY Bonds
14.27%
Canadian Gov't Bonds
3.84%
EM Bonds
13.11%
Global DM Bonds 
1.12%
Global HY Bonds
10.43%
Floating Rate Loans 
10.16%
Canadian Corp. Bonds
2.71%
Global HY Bonds
12.56%
Canadian Corp. Bonds
1.10%
EM Bonds
8.17%
EM Bonds
9.88%
Global Conv. Bonds
1.37%
U.S. Bonds
8.72%
Floating Rate Loans 
0.44%
Global Bonds
7.39%
Global Conv. Bonds
7.20%
EM Bonds
1.29%
Floating Rate Loans 
8.64%
U.S. Bonds
0.01%
Floating Rate Loans 
4.12%
Canadian Corp. Bonds
3.73%
Global DM Bonds 
1.28%
Canadian Corp. Bonds
8.05%
Global Conv. Bonds
-1.15%
U.S. Bonds
3.54%
U.S. Bonds
2.65%
U.S. Bonds
0.55%
Global Bonds
6.84%
Global Bonds
-1.20%
Canadian Corp. Bonds
3.38%
Global DM Bonds 
2.63%
Floating Rate Loans 
-0.69%
Canadian Gov't Bonds
6.42%
EM Bonds
-2.46%
Canadian Gov't Bonds
2.18%
Global Bonds
2.09%
Global HY Bonds
-2.72%
Global DM Bonds 
4.75%
Global HY Bonds
-4.06%
Global DM Bonds 
1.07%
Canadian Gov't Bonds
0.89%
Global Bonds
-3.15%

Source: Morningstar Direct, December 31, 2019 in local currencies. For illustrative purposes only. Canadian Corporate Bonds represented by FTSE Canada All Corp Bond Index, Canadian Government Bonds = FTSE Canada All Government Bond Index, Global Developed Market Bonds = S&P Global Developed Sovereign Bd TR LCL Index, EM Bonds = BBgBarc EM USD Aggregate TRD USD Index, Floating Rate Loans = S&P/LSTA Leverage Loan TR Index, Global Bonds = BBgBarc Global Aggregate TR USD Index, Global Convertible Bonds= ICE BofAML Global 300 Convt TR USD Index, Global High Yield Bonds = BBgBarc Global High Yield TR USD Index, US Bonds = BBgBarc US Agg Bond TR USD Index.

Equity Yields Are Attractive

Across major developed markets, equity dividend yields look attractive relative to their respective ten-year government bond yields. In fact, looking at the illustration below, this spread is the highest it’s been in decades. In addition to attractive yields, the quality of a company’s balance sheet, earnings outlook and future profitably should all be carefully examined – especially given expectations for a prolonged challenging and uncertain business environment. Investors should also ensure that they avoid overconcentration in individual stocks or sectors.

Equity Yields vs. Government Bond Yields (%)*

Source: AGFiQ as of September 30th, 2020. *Represented by the 10-year government treasury bond yields for the US, Canada, Germany and Japan. For illustration purposes only. One cannot directly invest in an index.

Listed Infrastructure Offers Stable Income and Portfolio Diversification

The COVID-19 pandemic has resulted in governments reassessing their spending on essential infrastructure projects and to propose significant stimulus to accelerate their economies. According to a 2016 study by the consulting firm McKinsey & Co., US$3.3 trillion needs to be invested globally in infrastructure every year to 2030 – just to support pre-COVID economic growth rates. The low interest rate environment has aided in the relative attractiveness of infrastructure assets and we expect this to continue as interest rates should remain at near zero for the next few years.

We believe that listed infrastructure can offer investors additional opportunities for income generation with lower correlations to aide in diversification and enhance portfolio resiliency.

Listed Infrastructure: Higher Potential Yield

Source: Morningstar Direct as of September 30, 2020. in U.S. dollars (US$). Global Infrastructure is represented by the Dow Jones Brookfield Global Infrastructure Total Return Index, Global Fixed income is represented by the Bloomberg Barclays Global Aggregate Total Return Index and Global Equities are represented by the MSCI World Index.  

Listed Infrastructure: Correlation to Traditional Asset Classes

Name 3 Year 5 Year 10 Year
Global Infrastructure 1.00 1.00 1.00
U.S. Treasuries -0.26 -0.07 -0.06
Global Fixed Income 0.47 0.54 0.57
U.S. Equities 0.79 0.73 0.72
Global Equities 0.81 0.76 0.76

Source: Morningstar Direct as of September 30,  2020 in U.S. dollars (US$). Global Infrastructure is represented by the Dow Jones Brookfield Global Infrastructure Total Return Index, US Treasuries are represented by the Bloomberg Barclays US Aggregate Bond Total Return Index, Global Fixed income is represented by the Bloomberg Barclays Global Aggregate Total Return Index, US Equities are represented by the S&P 500 Total Return Index and Global Equities are represented by the MSCI World Index. One cannot invest directly in an index.

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