Building Long-Term Income, Not Short-Term Yield

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This is a sponsored article from Baillie Gifford.

Paul Roberts
Client Service Manager
Baillie Gifford

There has been much consternation in recent years about the impact our current low-yield environment has on those requiring income. The ‘search for yield’ has led investors into increasingly esoteric types of investment, satisfying the desire for higher yields today. But at what cost? Tomorrow’s capital provides tomorrow’s income, and high yields do not come for free. When we think about income at Baillie Gifford, we focus on long-term sustainable income, not on high short-term yields.

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk.

Focus on actual income

What matters are the dollars and cents you receive in your hand, not a numerical yield. A 6% or 7% yield may seem attractive today, but that risks capital depletion in future – it’s no good if you receive six or seven cents per dollar in income this year if that falls significantly next year.

The Baillie Gifford Multi Asset Income strategy prioritises resilience and sustainability of income for investors who value predictability. We also recognise the benefit of protecting that income stream against inflation, which can have powerful effects in the long run. You want those dollars and cents you receive to maintain purchasing power over time. As such, the strategy is managed with the goal that the income stream should grow in line with inflation over a five-year period.

Balancing income and capital

We also recognise the symbiosis between income and capital. Therefore, the strategy has been devised with twin objectives: to offer an attractive and resilient monthly income; and to maintain the real value of income and capital.

Investors may well ask what a capital preservation objective is doing in an income strategy. We believe it is essential in ensuring a sustainable income stream – capital preservation needs to be front and centre. Remember, tomorrow’s capital provides tomorrow’s income.

Multi-asset for income

Our research has shown the best way to achieve a dependable long-term income stream is to combine a wide variety of income producing assets, particularly when aiming to protect against inflation. While various types of fixed income assets can provide attractive yields, they typically deplete capital – either through defaults, or simply in real terms. Combining with equities – specifically, dependable dividend-paying stocks – and real assets such as infrastructure and property, creates a powerful blend of complementary characteristics.

We have extensive experience of researching the behaviour of all major asset classes. Our modelling shows a portfolio which allocates around one-third to each of equites, fixed income, and real assets is best placed to meet the strategy’s objectives over the long term.

This combination of assets balances the income and growth trade-off effectively, but also harnesses the benefits of diversification, reducing the volatility of income as well as capital. Stress-testing the portfolio shows that uncorrelated asset classes can really help limit potential declines in income when any one class comes under pressure.

Low cost, liquid access

Asset class building blocks are constructed from bespoke income-oriented portfolios managed by our in-house specialist investment teams. All investments are tailored to meet the needs of the strategy, and there is no layering of costs in a fund of funds structure. Our property and infrastructure investments are made through listed vehicles, allowing us to provide daily liquidity while benefiting from the long-term characteristics that these less-liquid underlying assets typically provide.

Flexible allocation

We’ve spent more than a decade managing broad multi-asset portfolios, and that experience tells us active asset allocation is crucial to achieving the long-term outcomes we are aiming to provide for our clients. We have some simple diversification rules – a minimum of five asset classes at any time, and no individual asset class should contribute more than 50% of income – but we leave sufficient flexibility to manage the asset allocation in the best way possible.

Sustainable income requires realistic starting yields

The wide opportunity set, combined with our expertise in managing multi-asset portfolios, sets us up to deliver long-term outcomes that are highly valuable to investors. The strategy delivers a yield around 4%, but importantly aims to provide a growing income stream and capital growth to keep pace with inflation. Baillie Gifford Multi Asset Income seeks to provides long-term income, not short-term yield.

Important Information
The views expressed in this article are those of Paul Roberts, so should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. This article contains information on investments that does not constitute as independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. Any images used in this article are for illustrative purposes only.

Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK clients. Both are authorised and regulated by the Financial Conduct Authority.

Baillie Gifford Asia (Hong Kong) Limited 百利亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 licence from the Securities and Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited

百利亞洲(香港)有限公司 can be contacted at 30/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, Telephone +852 3756 5700.

This is a sponsored article from Baillie Gifford.

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