The biggest mistakes to avoid when chasing investment income


One of the key mistakes investors make when trying to generate better returns is taking on excessive amounts of risk without sufficient reward. With cash rates low and credit spreads compressed, the search for yield is forcing investors further and further along the risk spectrum.

This shift is seeing investors substitute lower risk, traditional fixed income investments with more high yield or leveraged loans – along with more Asian and emerging market exposure. By doing so, they are potentially increasing the probability of negative returns and introducing more return volatility into their portfolios.

Many investors also make the mistake of focusing on the headline yield number without really understanding the downside risks or knowing how to combine different risk elements of a portfolio to manage those risks more effectively.

As an investor, while you may want to use some high-risk assets to generate returns, you need to consider how much exposure these assets is appropriate and when to hold them at different points in the cycle. Added to this, you should think about interest rate exposures and whether foreign currency exposure can play a role in diversifying your portfolio and reducing total risk.

It can be okay to take on more risk, but it needs to be a calculated risk and you need to ensure you are adequately compensated for the additional risk. Diversification remains important, so we think most investors should seek to balance their returns against their portfolio’s risk profile by incorporating a defensive income component.

How Schroders is finding defensive income

In today's markets, investors searching for income have a real challenge. Cash rates and term deposit rates are low, and hybrids – the traditional source of higher returns for smaller investors – are only part of the solution for investment portfolios.

The Schroder Absolute Return Income Fund aims to help solve this problem by investing in a very broad opportunity set that seeks to deliver defensive income. We look beyond cash, term deposits and hybrids to access global opportunities delivering defensive, regular monthly income for clients.

We actively diversify by building a defensive portfolio using multiple levers to invest in different bond, currency and credit markets globally, along with using assets that benefit when yields fall. By actively managing these three components, we access opportunities across the broad opportunity set to deliver defensive income to clients in an increasingly challenging market environment.

Managing calculated risks

The reality is that you cannot deliver a return above the risk-free rate without taking calculated risks. We believe this can be done by actively managing the various components of the portfolio, including default risk, credit risk, interest rate risk and currency risk.

For example, in the credit markets, we're actively looking to invest in assets with valuation support while avoiding those which are likely to default or come under price pressure. We look to minimise interest rate risk by managing our duration exposure, and we also look to use the currency markets to help manage downside risk.

By actively managing these components as part of our portfolio construction, we can take calculated risks to achieve a defensive outcome for our clients.

Complementing traditional fixed income assets

The Schroder Absolute Return Income Fund complements a broader allocation to more traditional fixed income products given it has less interest rate risk and an opportunity set that goes beyond traditional fixed income benchmarks.

For example, over the past year, traditional fixed income has delivered a negative return as duration-based assets have come under pressure as yields have risen – whereas the Schroder Absolute Return Income Fund and the Schroder Absolute Return Income (Managed Fund) delivered a positive return of 2.28% (after fees)¹. This shows that the Fund is complementary in terms of the total fixed income positioning and can also deliver income through different phases of the market cycle.

Given the outlook for fixed income markets remains mixed with uncertainty lingering around growth and inflation, it further highlights the importance of balancing risk and return using an objective based diversified portfolio.

How to access the Schroder Absolute Return Income Fund

You can access the Schroder Absolute Return Income Fund by making an application to invest using the application process available on our website www.schroders.com.au. You can also access the quoted version of the fund, the Schroder Absolute Return Income (Managed Fund) (CXA:PAYS), on Chi-X by investing through your broker in the same way as investing in a listed security.  Please refer to the product disclosure statement for the fund and consider your objectives, financial situation and needs before making any investment decisions.  You can also access the target market determination for any of the Schroders funds at www.schroders.com.au.

1 Returns net of fees for the 12 months ending 30 September 2021.  Past performance is not a reliable indicator of future performance.

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