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BNP Paribas WM: Time to look at multi-asset mandates with total return focus

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As capital gains are increasingly harder to achieve because of the close to record high levels of equity markets, BNP Paribas Wealth Management is urging investors to shift exposure to multi-asset mandates that aim for total return — comprising both the targeted persistent income and capital growth.

Matthew Tham, BNP Paribas WM

“Such a portfolio, is expected to outperform during periods of uncertainty in view of its recurrent income flows through its investment in high quality companies,” Matthew Tham, head of discretionary portfolio management, Singapore at BNP Paribas Wealth Management told Asian Private Banker.

Tham explained that by focusing on the persistent and consistent income, investors are less likely to sell into market corrections in times of capital needs. Also, being in multi-assets allows the manager to take advantage of the best opportunities arising from the various components, benefiting from their low correlation and providing sufficient diversification across various sectors and regions.

Indeed, quite a number of private banks have launched multi-asset strategies over the past 12 months, either through a partnership with certain third party asset manager or by manufacturing the strategies in house.

For example, J.P. Morgan Asset Management told Asian Private Banker earlier that it saw private banks in the region increasingly add income-oriented multi asset funds as an alternative way to get exposure to equity markets, in a bid to reduce market beta and better manage downside risks in their portfolio.

Pockets of investment opportunities
Despite trillions of global bonds yielding negatively, Asian investors’ search for income remains insatiable. As a major source of fixed cash flow, bonds continue to gain traction among investors and this trend probably won’t shift, Tham said.

“We are seeing strong inflows into bonds this year and this will likely continue, with monetary policy remaining accommodative for bonds,” he said, adding that albeit global yields are trending lower, some credits are still being supported.

“While Treasury yields have been falling against a backdrop of a more dovish Fed and a weaker economic growth outlook, corporate option adjusted spreads (OAS) have been widening. The OAS are now trading in line with the historical average mean which is supportive of credit,” he said.

On the other hand, the DPM manager has seen healthy dividend yields from both global REITs and rising dividends from global equities in selected segments and sectors.

“Value has underperformed growth for several years and, as a result, dividends have been rising for value stocks. We believe this represents a good buying opportunity,” Tham said, highlighting that the S&P 500 Dividend Aristocrats index — consisting of companies that have followed a policy of consistently increasing dividends annually for at least 25 years — has outperformed the broader S&P 500 Index over the longer term.

According to the latest data, the 10 years annualised returns of S&P 500 Dividend Aristocrats index is +14.9% against the S&P 500 Index of +13.7%.

Sustainable dividend policy
Even so, Tham pointed out that within equities, the bank will not only focus on those high dividend paying stocks, because a growth outlook is vital as well.

“We do not just invest in the highest paying dividend stocks. It might not be a good approach as many of these companies pay out most of their earnings due to a lack of growth prospects. These companies risk dividend cuts in a weaker or slower growth environment,” he said.

“We focus on companies that have a sustainable dividend paying policy with the ability to grow dividends over time, supported by strong cash flows. Many of these companies provide good value for capital appreciation and allow us to ensure consistent and stable income.”

Additionally, on REITs the DPM head cautioned investors to be selective, with a preference for the US and Singapore REITS as they are in a ‘sweet spot’ due to low rates, low inflation and low to moderate economic growth in these two countries.

“To decide on which REITs to purchase,” Tham shared, “it is important to examine several factors: the sponsor; the quality of the underlying portfolio; the lease expiry of the tenants; the track record of management; the ability to grow the yield; and the gearing profile.”

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