Brad Bugg, Morningstar’s head of multi-asset income, says retirees have always looked for two things: income to live off but also capital stability.
Morningstar launched a diversified income fund in 2014. It has an asset allocation of 40% growth assets like shares and property and 60% defensive assets such as cash and bonds.
Since inception it has earned 4.72% a year against its benchmark of 3.59%. “Its goal is to generate CPI plus 2%,” says Bugg. “In the current environment its target return doesn’t sound sexy or appealing. In a normal environment where interest rates rise back to normal levels, it will probably generate returns in a range of 4–6%.
“We’ll identify a portfolio of stocks which we think will give us a good income, we also look to fund managers to build certain exposures. In the international bond space, for instance, you’re getting higher and higher yields there so we look to fund managers to go out and source the best opportunities in that market.
“We also use ETFs. They are a good way of getting access to markets, particularly international markets, which many of us may not be able to do ourselves.” Bugg says we are at an inflexion point. The valuations of a lot of the dividends-paying stocks that selfmanaged super funds have flocked to are stretched, and bond yields are at a level where they have begun to rise.
“In terms of the policy debate around franking credits, it’s going to be an interesting period for those stocks which people have traditionally sought out as generating income. We don’t know what the outcome would be of Labor’s proposed policy but regulatory risk can sometimes be more destructive to value than companies doing the wrong thing.”