Generating income in a low yield environment

Shaw Roberts, Investment Manager, looks at how we could offer the perfect solution for savers and retirees looking to generate income in a low yield environment.

In an environment of extremely low global interest rates, government bond yields and corporate bond yields, it has become ever more challenging for savers and retirees to generate income. Whilst ultimately necessary, Central Bank actions of easing monetary policy through using tools such as Quantitative Easing (QE) and cutting interest rates close to zero has negatively impacted millions of citizens who rely on these rates to generate income. Savers and retirees now have to navigate the daunting prospect of trying to find an appropriate way of generating sustainable income in a low rate/yield environment.

The ATI Monthly Income Bond Fund (MIBF) is a potential solution in this low rate/yield environment. MIBF is a sterling denominated corporate bond fund that was designed to appeal to clients that have a preference for income. Since its launch in June 2010 the Fund has provided its investors with a consistently high annual income, paying an average of 6.0% per annum (Source: ATI, Oct 2016, gross of tax) despite the fact that Government yields have fallen from 3.50% to less than 1.25% over this period (Bloomberg, Oct 2016).

It is worth highlighting that this level of income hasn’t been achieved by increasingly higher levels of credit risk, as the Fund continues to invest in a portfolio of high quality corporate bonds. Moreover, an internal limit ensures that portfolio maintains a minimum average credit rating of A-, and the Fund has complied with this since inception in June 2010. In addition to a focus on high quality issuers, the Fund has also been consistently managed with significantly lower levels of interest rate risk than the majority of its competitors. Thus, on average the Fund has typically been positioned with interest rate risk of between half and two thirds of a standard corporate bond Fund.

Key  Characteristics

MIBF

Sector

Relative

Distribution Yield**

5.8%

3.1%

86% higher

Credit Quality*

A

BBB

Higher Quality

Int Rate Risk*

4.2

8.2

-49% less

*Sector Int rate risk based on ML £ Corps

** Sector Distribution Yld: IA £ Corporate Bond sector

When compared to other Funds that have similar levels of interest rate risk, MIBF has consistently delivered significantly higher level of income to its investors throughout as well as vastly superior total returns. 

Measure Cumulative Annualised
Total return (net of expenses) 54.40% 7.04%
Capital Return 6.90% 1.05%
Income Return 47.50% 5.99%

Volatity

- 4.82%

Source: Bloomberg, Oct 2016

Key characteristics:

Sector leading levels of income delivered monthly to clients

Currently MIBF is generating an income yield of c.5.8% as at Oct-2016. According to data by Financial Express (FE) this is the highest distribution in the IA £ Corporate Bond sector. We distribute to clients the income that is earned over the period. This is in contrast to peers that depress income by taking charges from the income that is generated. MIBF takes these charges from capital thereby enhancing distributable income.

With lower levels of credit risk

MIBF targets high levels of credit quality within its portfolio and currently has a “A” credit rating. Achieving high levels of income in the current low rate environment could be made easier by sacrificing the quality of assets within the portfolio. We do not believe that we should expose clients to high levels of credit risk to achieve their income targets. Strong stock selection coupled with strong levels of liquidity in the Fund allows MIBF to target specific corporate bonds that deliver on the Funds objectives without sacrificing on quality.

And lower levels of Interest rate risk

With Government bond yields in the UK near record lows we believe the risk/return is skewed significantly to the downside. In other words we believe that you are not compensated for the interest rate risk taken within traditional bond Fund. The Fund therefore is currently managed with nearly half the interest rate risk of the £ corporate bond index. This will protect clients when the interest rates begin to normalise and values ultimately fall. We are able to reduce the interest rate risk whilst still maintaining the market leading income delivery to clients.

Lower levels of ESG exposure

Whilst delivering the above characteristics of the Fund, MIBF also scores better than the sector in terms of ESG exposures whilst also being 50% less carbon intensive than the wider sector.

In summary, by making use of strong levels of expertise, an innovative mandate, strong levels of market liquidity, the ATI Monthly Income Bond Funds is able to deliver a market leading distribution yield to clients with superior levels of credit quality and lower levels of both credit and interest risk.


Investments can go down as well as up.  Investors may get back less than they originally invested.

Past performance should not be seen as a guide to future performance. The value of investments and any income from them can go down as well as up. Investors may get back less than they originally invested.