Using alternative income streams within a portfolio

Using alternative income streams within a portfolio, such as infrastructure. Increasingly, multi-asset managers are relying on alternatives. Why is this?

As central banks have kept interest rates low, investors have been forced to look beyond traditional assets in order to maintain income at historic levels.  We can argue whether searching out income per se is an efficient investment strategy, but the fact remains that a significant proportion of investors are focussed on income.  Since the global financial crisis, asset prices have risen and accompanying yields (not necessarily absolute pay outs) have fallen.  This fall in yield led to a search for reasonably robust income generation and property and infrastructure look attractive in this light.  Both boast incomes that in the short term should be relatively insulated against short term economic conditions and over time should move with inflation (explicitly so in the case of some infrastructure revenue streams).  This makes them attractive investments in their own right (at the correct price) never mind the paucity of income elsewhere.  They tend to be good diversifiers within portfolios, but investors should not lose sight of their drawbacks.  Those of commercial property have been exposed both in the aftermath of the financial crisis and subsequently (illiquidity causing large price swings in the main vehicles used to access the asset class – that is if they don’t gate themselves and prevent any access at all).  Infrastructure as an asset class is less familiar to most investors, however it should be noted that with much of the value ascribed to their assets being in the form of future cash flows, they are vulnerable to changes in the discount rate.  If rising interest rates push discount rates higher, the current value of infrastructure assets will fall. 

As interest rates normalise gradually, the income aspect of some alternatives will be less attractive relatively, but their contribution in terms of diversified and less correlated sources of return will remain.

Andrew Herberts

Head of Private Client Investment Management (UK)

Commentary first appeared in:

FT Adviser (on the 22nd March 2018)

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