Multi-asset income strategy embraces alternative assets
Kames Capital is a UK-based investment manager with expertise in bonds, equities, real estate, alternatives and multi-asset investing. The company is part of Aegon Asset Management, a global investment business which manages $382 billion on behalf of clients in Europe, Asia and North America.
Meeting income challenges
Launched in 2013, its diversified income strategy seeks income and capital growth by investing in a multi-asset portfolio of income-themed investments. It targets a yield of 5% per annum with additional growth of 2%-3% per annum to maintain the real purchasing power of income.
Based in Europe, a dedicated multi-asset team allocates funds to both traditional income engines - bonds and equities – as well as to alternatives such as listed property and other specialist income investments.
Chart 1: Asset allocation of Kames Diversified Income Strategy
Having a healthy exposure to alternative assets differentiates this strategy from other multi-asset strategies. Alternative assets currently sit at 30% of the portfolio’s assets, but they have ranged from between 25% to 36% of assets over the past three years says Vincent McEntegart, co-manager of Kames Capital’s Diversified Income Strategy.
“Alternative investments such as property, infrastructure, real asset leasing and renewable energy have become valuable components of our multi-asset portfolios. They not only provide attractive income and growth opportunities but help to diversify risk due to their relatively low correlation with traditional asset classes such as bonds and equities,” he says.
Here’s a closer look at what the asset manager likes about alternative assets:
Property
Property is an income-generating asset that typically provides a high initial yield plus the potential for income growth and capital growth. Kames Capital invests in property through listed property companies, typically structured as real estate investment trusts (REITs). These are essentially investment vehicles that purchase real estate holdings such as offices, shopping malls and student accommodation and rent them out. They provide an indirect exposure to global property markets and daily liquidity should Kames need to sell holdings or tilt the portfolio towards different regions or sectors.
Infrastructure
Infrastructure is an alternative asset class attracting strong investor interest. As government budgets are squeezed globally, the private sector has stepped in to provide financing at a time when infrastructure projects are seen as vital to economic growth.
A number of listed investment vehicles have been set-up specifically to target infrastructure assets and operate contracts for hospitals, schools, transport and utilities. These allow investors to access assets which offer low correlations to traditional asset classes, stable income yields, and also provide an element of long-term inflation protection.
Real asset leasing
Real asset leasing can be described as a bond-like investment that provides attractive total returns through a blend of regular income and potential capital gains. An example is aircraft leasing funds, which provide income and capital growth to investors through owning and leasing commercial aircraft. By holding these assets within a fund structure, the returns are more accessible to a broader range of investors.
This model has seen leased assets grow to cover almost 40% in of the global commercial aircraft fleet in service. Although air travel can be a volatile industry, leasing gives airlines greater flexibility and allows them to expand without buying every aircraft in their fleet. For investors, this asset class provides an opportunity to earn an attractive yield and total return without taking on the greater risk of investing in an airline company’s shares.
Renewable energy
Renewable energy companies primarily invest in wind and solar assets. They also supply investors with an income stream that is partly linked to government-backed, inflation-linked payments. Because wind and solar production volumes are reasonably predictable, revenue streams for renewable energy companies are much more reliable than for many other businesses.
The two main risks associated with these investments are retrospective changes to the regulatory support and significant declines in wholesale power prices, given energy prices have fallen in recent years. In isolation, this could have reduced dividends paid by renewable energy companies, but it’s been offset by project companies achieving greater operational efficiencies and securing cheaper debt financing.
Seeking superior risk-adjusted returns
Kames Capital’s multi-asset approach seeks to reduce and manage risks through rigorous research and effective diversification. For McEntegart, managing risk and consistent delivery of income is central to the appeal of this strategy.
“Our approach to asset allocation and stock selection is driven by the delivery of our 5% income target, while managing volatility at between half and two-thirds of global equity markets and limiting capital drawdowns. Alternative investments help us achieve these objectives.”
McEntegart says the asset manager believes the current investment environment is positive, despite political uncertainties.
“Attractive and dependable levels of income are increasingly sought after by investors globally and a diverse multi-asset portfolio has the flexibility to exploit opportunities through dynamic asset allocation and good stock selection,” he says.
For more information contact Aegon Asset Management:
Mabel Cho, head of North Asia business development, email: [email protected]
or
Yuji Amamoto, country manager and representative in Japan, email: [email protected]
Important information
For professional and institutional investors in Asia only and not to be distributed to or relied upon by non-professional and institutional clients. This article is for information purposes only and is not a solicitation to buy or sell securities or engage in investment services.
Past performance is not a guide to future performance. Outcomes, including the payment of income, are not guaranteed and capital is at risk. The diversified income strategy assumes that fees are deducted from capital which may increase income payments but constrain capital growth.
Opinions expressed represent our understanding of the current and historical positions of the market and are not an investment recommendation, research or advice. Any securities and related trading strategies referenced may or may not be held/used in any strategy/portfolio. Any Opinions and/or example trades/securities are only present for the purposes of promoting Kames Capital's investment management capabilities. Sources, both internal and external, used are deemed reliable by Kames Capital at the time of writing.
All data is sourced to Kames Capital unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice.
Kames Capital plc is authorised and regulated by the Financial Conduct Authority.