Expand the opportunities for your income solutions
“WE MAINTAIN A FOCUS ON RISK-ADJUSTED RETURNS IN ALL OF OUR FUNDS, BUT MACKENZIE HAS ALSO DEVELOPED SEVERAL INNOVATIVE PRODUCTS WITH INVESTORS’ DESIRE FOR DOWNSIDE PROTECTION IN MIND”
Trad it ion al strategies for income investing face big challenges in today’ s lowyield environment. Riska verse investors have relied on core bond funds, comprised of investment grade government and corporate bonds, to be single solutions for delivering income, capital preservation and equity portfolio diversification. However, t he upside/ downside profile of these investments has become skewed to t he downside as t heir yields may not be sufficient to offset the price declines associated with rising interest rates. For income investors conditioned to think of their bond portfolios as safe havens, this could be an unwelcome surprise.
One of the best strategies to navigate this environment is to expand the scope of income- oriented asset classes to include high yield bonds, floating rate loans, emerging market debt, preferred shares and equities.
“What income retirees really need is cash flow, which can be generated not only from interest coupons but from dividends and capital gains as well. By drawing f rom a broad spectrum of income- producing assets, diversified portfolios can be constructed with the desired risk characteristics,” says Steve Locke, Portfolio Manager and Head of the Fixed Income Team at Mackenzie Investments. “In fact, incorporating s ome non- investment grade bonds and even equities generally increases the expected return of the overall portfolio with a volatility of returns that is similar to, or even perhaps below, that of a Canadian core bond fund.”
PROTECT AGAINST THE DOWNSIDE
Since asset classes that offer additional i ncome often come with additional risk, Mr. Locke says risk management should be an integral aspect of t he i nvestment process. “Rigorous f undamental research underpins security selection in our suite of Strategic Income funds. Avoiding undesirable risks is the first pillar in a strategy of downside risk mitigation,” he says.
Mackenzie just launched its US Strategic Income Fund to complement its Strategic Income Fund and Global Strateg i c Income Fund, balanced funds that invest in divi- dend- paying equities and a range of fixed income assets. These income solutions are designed to generate income and manage volatility through the market cycle.
Mackenzie also manages risk through portfolio monitoring, tactical positioning for prevailing market conditions and, at times, using hedging strategies for downside protection.
“We maintain a focus on risk- adjusted returns in all of our funds, but Mackenzie has also developed several innovative products with investors’ desire for downside protection in mind,” says Michael Sch nit man, Senior Vice President, Product, at Mackenzie. “For example, Mackenzie Monthly Income Portfolios are globally diversified, multi-asset portfolios designed to provide a consistent income stream, some long- term growth and inflation protection. They also employ a proprietary hedging strategy to limit downside and protect capital.”
Mr. Schnitman also says t he Mackenzie Unconstrained Fixed Income Fund and Mackenzie Unconstrained Bond ETF ( ticker: MUB) are f lexible and highly tactical fixed- income funds that invest in global sovereign and credit markets. “Both funds use an options strategy to protect the portion of the portfolio invested in high yield from a sharp drawdown stemming from stress in credit markets,” he adds.
To i ncome i nvestors feeling daunted by t he low- yield environment, Mr. Locke says a financial advisor can help def ine your income objectives and risk tolerance. “There are a number of great solutions that balance the need for income with robust risk management so investors can achieve their goals.” Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.