WP was lucky enough to be in the same room as Dr. Woody Brock last week when the famed economist spoke to a small group of invited guests about the investor’s valiant search for yield; it’s not going to be an easy one.
WP was lucky enough to be in the same room as Dr. Woody Brock last week when the famed economist spoke to a small group of invited guests about the investor’s valiant search for yield; it’s not going to be an easy one.
The writing, according to Brock, is on the wall. Equities have had their big run. Going forward most investor returns will come from dividends and other forms of yield-producing income rather than capital gains.
The question for advisors: How are you going to keep your clients happy in this scenario?
Recently, we asked Daniel Solomon, lead portfolio manager and CIO with NEI Investments about this vexing situation. With government bonds going negative in places like Denmark and Switzerland, is it even possible for investors to generate cash from fixed-income?
“People are asking, ‘How do I get the yield I need?’ The government of Canada bond yield is 1.37%. With inflation at 1.5%, you have to be willing to lose money if you want that asset class. What we wanted to do is engineer a fund that generates more dividend per year.”
Solomon’s talking about NEI’s Global Strategic Yield fund, which got its start this past December. The investment objective of the fund is to provide investors with income and long-term capital appreciation by investing in a diversified mix of yield generating equity and income mutual funds around the world.
“The eight different sleeves in this fund tap different areas that generate yield. You can get up to 8% covered calls. You can find government bonds, particularly outside of Canada, that pay much higher. There are some pockets that have great profiles,” says Solomon. “By doing this in each sleeve, we can generate much higher total yield, 4.33% – that’s higher than anything you can put together. You need to get yield from everywhere.”
Solomon’s approach is clearly driven by investors’ thirst for yield.
#pb#
“We’re after yield today. We’re exchanging potential upside for income today. We are transferring some of the upside into income now. For us, in terms of a yield portfolio, it makes sense.
That’s the portfolio manager’s view of yield. But what about the advisor?
For insight on this front we went to Toronto advisor Greg Hall, a broker with RBC Dominion Securities.
“Negative yields are a new phenomenon and would indicate to me that something is clearly wrong,” says Hall. Does this have something to do with deflation being on the horizon? I honestly don’t know as this is uncharted territory.”
So what are some of the products Hall’s recommending at the moment?
“For fixed income, I recommend short term municipal, provincial and federal bonds with short duration that avoid any exposure to Europe. Hold to maturity and minimize or remove interest rate risk.”
“Alternatively, I use low volatility (read USA) ETF’s that offer some yield with the benefit of being very liquid so one can raise capital quickly if necessary. Another fixed income alternative are bond or fixed income fund of fund ETF’s that are so diversified, the risk of catastrophe is all but eliminated.”
Now is not the time to be playing around.
“The truth is we are at a crossroads and it is difficult to predict what will happen. The world central banks are terrified of deflation and the negative yield option is untested. Now with the added reality of China suggesting the possibility of a hard landing we need to be very careful.”
Given the choice between negative yields and cash, Hall will take the cash thank you very much. Govern your clients accordingly.
The writing, according to Brock, is on the wall. Equities have had their big run. Going forward most investor returns will come from dividends and other forms of yield-producing income rather than capital gains.
The question for advisors: How are you going to keep your clients happy in this scenario?
Recently, we asked Daniel Solomon, lead portfolio manager and CIO with NEI Investments about this vexing situation. With government bonds going negative in places like Denmark and Switzerland, is it even possible for investors to generate cash from fixed-income?
“People are asking, ‘How do I get the yield I need?’ The government of Canada bond yield is 1.37%. With inflation at 1.5%, you have to be willing to lose money if you want that asset class. What we wanted to do is engineer a fund that generates more dividend per year.”
Solomon’s talking about NEI’s Global Strategic Yield fund, which got its start this past December. The investment objective of the fund is to provide investors with income and long-term capital appreciation by investing in a diversified mix of yield generating equity and income mutual funds around the world.
“The eight different sleeves in this fund tap different areas that generate yield. You can get up to 8% covered calls. You can find government bonds, particularly outside of Canada, that pay much higher. There are some pockets that have great profiles,” says Solomon. “By doing this in each sleeve, we can generate much higher total yield, 4.33% – that’s higher than anything you can put together. You need to get yield from everywhere.”
Solomon’s approach is clearly driven by investors’ thirst for yield.
#pb#
“We’re after yield today. We’re exchanging potential upside for income today. We are transferring some of the upside into income now. For us, in terms of a yield portfolio, it makes sense.
That’s the portfolio manager’s view of yield. But what about the advisor?
For insight on this front we went to Toronto advisor Greg Hall, a broker with RBC Dominion Securities.
“Negative yields are a new phenomenon and would indicate to me that something is clearly wrong,” says Hall. Does this have something to do with deflation being on the horizon? I honestly don’t know as this is uncharted territory.”
So what are some of the products Hall’s recommending at the moment?
“For fixed income, I recommend short term municipal, provincial and federal bonds with short duration that avoid any exposure to Europe. Hold to maturity and minimize or remove interest rate risk.”
“Alternatively, I use low volatility (read USA) ETF’s that offer some yield with the benefit of being very liquid so one can raise capital quickly if necessary. Another fixed income alternative are bond or fixed income fund of fund ETF’s that are so diversified, the risk of catastrophe is all but eliminated.”
Now is not the time to be playing around.
“The truth is we are at a crossroads and it is difficult to predict what will happen. The world central banks are terrified of deflation and the negative yield option is untested. Now with the added reality of China suggesting the possibility of a hard landing we need to be very careful.”
Given the choice between negative yields and cash, Hall will take the cash thank you very much. Govern your clients accordingly.
