The path forward is very uncertain; we offer a four-step
approach capable of delivering returns underpinned by
Income investors have taken a severe hit thanks to COVID-19. The March sell-off saw
higher-yielding assets – across stocks, bonds and alternatives – underperform as the
longstanding ‘hunt for yield’ was replaced by a ‘hunt for safety’.
To make matters worse, many companies cutting dividend payments to preserve cash has
left income investors with fewer options.
Investors should still be wary of the extraordinary level of uncertainty about how the future
may unfold. Now is not the time for taking big bets. Rather, we think a cautious approach
focused on income strength and sustainability is the best way forward.
We believe four elements can help us navigate the coming challenges.
It helps if you can start from a position of strength
The Fund’s performance capture to the upside versus the downside is a good
measure of comparative strength. Limiting the drawdown in returns, in absolute
terms and relative to many of our peers3, leaves us well placed to recover,
especially when you consider that many asset classes and individual securities
still have room to rebound after the price dislocations seen in March.
Figure 1: GMAI upside/downside capture since inception
Ninety One Global Multi-Asset Income Strategy average monthly gain and loss
as a proportion of Global Equities average gain and loss. Source: Ninety One,
in USD gross of fees and taxes with income reinvested, Global Equity returns
are for MSCI AC World Index NDR, from 01 June 2013 to 31 March 2020.
Capturing more upside than downside means less time is needed to recover back to
positive territory after a period of drawdown. What’s more, our performance profile in
this recent episode is broadly in line with our longer-term numbers, giving us
confidence in our ability to recover this time as we have done after previous major
A key design difference in our portfolio
How were we able to capture more upside than downside during COVID-19? We think
it’s down to a key design difference in our portfolio compared with other income
strategies, which has to do with our bottom-up security selection process4.
In equities, for example, income investors often go for the highest dividend stocks
(naturally). We don’t do this because we think very high yields are often a risk
indicator as they can imply unsustainable dividend payments. Through a bottom-up
process based on fundamental research conducted by our analysts, we instead seek
to find companies that pay sustainably high dividends, but not the highest.
Please refer to this piece for more detail on the difference of our process versus
other equity income strategies.
‘Our research-led process interrogates the profitability and capital allocation decisions of a company to see if its income stream is based on resilient characteristics’
Table 1: Our yield sweet spot is high, but not the highest
The yield of the underlying securities is not guaranteed, there is no assurance of its stability and sustainability and it
does not represent the yield of the Fund. A positive yield does not imply a positive return.
Our research-led process interrogates the profitability and capital allocation decisions
of a company to see if its income stream is based on resilient characteristics, and is
not just reliant on riskier drivers, such as leverage. This in turn has created more robust
income from the overall portfolio.
This combination of better COVID-related upside versus downside capture due to our
bottom-up focus on resilient income securities is why we believe we are starting the
rest of the year from a position of strength as we now seek to take advantage of some
Taking advantage of pricing dislocations
To be clear, we were not immune from the sell-off in markets. The Fund’s
equity exposure lost value, with higher-yielding equities generally
underperforming the broader market. Our property holdings also sold off.
That said, the considerable falls created opportunities where prices
dislocated from fundamentals. Despite the considerable recovery in asset
prices since the sell-off, persistent price dislocations resulting from the
prior indiscriminate selling can provide ammunition for future returns. This is
particularly true from a bottom-up security selection perspective, but also
from a top-down asset allocation perspective.
One example is the pricing of long-dated high-quality corporate bonds,
where the market stress and drying up of liquidity in March led to irrationally
sharp falls amongst some very robust household names. Figure 2 puts this
Figure 2: High-quality companies underperform US Treasuries significantly
No representation is being made that any investment will or is likely to achieve profits
or losses similar to those achieved in the past, or that significant losses will be
avoided. This is not a buy, sell or hold recommendation for any particular security. For further
information on specific portfolio names, please see the Important information section. For
illustrative purposes only. Source: Bloomberg, 18 May 2020. The chart above shows the price of
the corporate bond divided by the price of a US Treasury with a similar maturity. This shows the
corporate bonds trading at a discount relative to similar-dated Treasuries.
These moves reflected market panic but created an opportunity to benefit
from a return to more rational pricing, which has now begun to happen.
We added significantly to these bonds and those of other similar issuers
during the period of maximum distress in late March.
Significantly, our ability to look across asset classes means that we are well
placed to spot apparent pricing inconsistencies between the bonds and
the shares of a company such as Amazon or Microsoft. Identifying these
opportunities requires a holistic analysis of markets and we are encouraged
by what our cross-asset collaborative research specialists have uncovered
in recent weeks. We provide a summary in Table 2.
Table 2: Pricing dislocations and income opportunities across our investible universe
In short, we believe the path forward provides a rich landscape of good opportunities to take
advantage of. We believe doing so selectively and in a measured way, based on our bottom-up
research-led process and informed by top-down awareness of the shifting macro picture, will be key./p>
Identifying resilient sources of income
Even though stimulus should limit the damage done by lockdowns, the economy’s recovery
will likely be messy and uneven. The rebound in markets so far has seen many assets
recoup a large portion of the losses suffered year-to-date, but it seems hopeful to assume
that we are completely out of the woods just yet. This makes it critical to carefully analyse
potential opportunities for those which are best placed to withstand continuing instabilities
and shocks in markets.
Resilient returns from bottom-up stock picking
Though spotting pricing inconsistencies from cross-checking different markets is exciting,
we believe our primary edge lies in bottom-up security selection to build resilient returns.
This means focusing on the quality of each, individual holding within our portfolios and
keeping our carefully chosen selections to a concentrated number. On average, we hold
only 40-50 stocks5 in our equity portfolio, while a fund of funds portfolio with exposure to
global equities will have look-through exposure to thousands of companies. The portfolio
invests in a relatively small number of individual holdings. This may mean wider fluctuations
in value than more broadly invested portfolios. A similar approach is adopted for other
asset classes, such as corporate and government bonds, listed property and infrastructure.
This research-led process, and the difference in design as mentioned above, we think, results in a
differentiated set of positions if we compare the characteristics of the securities we own to those of
the market. We believe this is helpful for our investors as it means they avoid repeating the same
investments they might hold elsewhere.
Table 3 shows our top ten equity holdings. We believe they each have the resilient characteristics we
look for to create a portfolio that seeks to generate returns through sustainable income, and this in
turn helps to deliver robustness exemplified by the positive performance skew we aim to deliver.
Table 3: Top ten equity holdings
No representation is being made that any investment will or is likely to achieve profits or losses similar to
those achieved in the past, or that significant losses will be avoided. This is not a buy, sell or hold
recommendation for any particular security. For further information on specific portfolio names, please see the
Important information section. The portfolio may change significantly over a short space of time. Source: Ninety One,
30 April 2020.
Partners Group Ag / Weight: 1.15% / Yield: 3.1%
- Very strong record of investment performance
- High and stable management fees
- Industry highest returns of capital
- No company level debt and significantly less leverage than peers
- High degree of ownership from the founders
- Progressive with dividend growth over long term
Watsco Inc / Weight: 1.10% / Yield: 4.3%
- Leading market share in a highly fragmented industry
- Return on capital are attractive and the balance sheet has little debt
- A large proportion of sales are recurring in nature because they come from maintenance and repair driven demand
- No company level debt and significantly less leverage than peers
- The company has very strong management with a unique incentivisation structure that encourages long term
Roche Holding Ag / Weight: 1.02% / Yield: 2.8%
- Roche is a European pharmaceutical company and is the undisputed leader in Oncology
- It has a deep pipeline of drugs in development and has displayed impressive R&D efficiency historically which has
enabled the company to drive growth organically. As a result, their historical capital allocation has been amongst the
best in the industry, being one of the only pharma stocks to not engage in large scale M&A which has in turn
underpinned high profitability levels
Source: Ninety One, May 2020.
By showing this, we hope to demonstrate the level of detail required to build a sustainable
income portfolio. There are many factsheets that will be showing high yields right now after
the market turmoil. The key question investors should ask is how sustainable that yield is?
What are the building blocks and what are the underlying risks to those income streams?
The current yield of our Fund is 4.8% (3.2%)6. With our research-led bottom-up approach,
we believe we have a portfolio of attractively-valued securities with resilient yieldgenerating characteristics that are well placed as a result to deliver more persistent levels
of yield and performance.
Proceed with caution
Our central risk case assumes a sharp economic recovery as lockdowns ease and
many businesses come back online, followed by a slower rebound in some parts of
the economy which take longer to normalise. In this scenario, we believe, our
approach gives us a head start in making back recent losses and then participate in
the recovery in the prices of the resilient yielding securities we hold.
Significant risks remain, however, such as a second wave of the virus or a slower
recovery in companies requiring social distancing, leading to more lasting damage to
jobs and income, and to a more protracted recession.
While our security selection is expected to do the heavy lifting in terms of future
return generation, diversification and risk management will be used to navigate
through what are expected to be volatile markets. Given the uncertainty we mention
above, we are still positioned fairly cautiously.
We are excited about our ability to participate in opportunities across a very broad
range of global markets, and importantly we are not reliant purely on equity gains
For example, and to add colour, our addition to corporate bond exposure has been
not only focused on higher quality names; we are yet to add meaningfully to the
emerging markets in either the sovereign or the corporate bond space, where we are
continuing to gather insight through our ongoing research and collaboration with the
relevant firmwide investment teams. Though there are many price dislocations across
the equity and debt sphere in emerging markets, the virus path in each market is
uneven and multifaceted. The hit to tourism, sensitivity to the decline in oil prices,
factors determining the potential severity of the virus, and the extent to which policy
can respond, are some of a vast array of considerations that need to be mapped
before adequately assessing the investment potential. Security selection once again
is likely to be key. Given our more defensive approach that looks to build returns
through sustainable income, we think we are positioned appropriately and do not
believe now is the time to go all in.
That said, we are long-term investors and we are mapping not only the short-term impacts of
the COVID-19 crisis, but the medium and long-term ones too7
. As we learn more and more each
day, we believe an incremental approach that regularly considers and acts on the rapidly
changing investment environment is the right way for us to proceed.
Ultimately, it is through a single-minded focus on our defensive return objective driven by the
search for resilient income at the security level across different asset classes that will give us
the best potential to achieve positive returns sustainably as we continue forward on this
1. Silberston, R., "Fast and furious: policymakers respond to COVID-19," Ninety One, April 2020.
2. Mahtani, S., Morgan, D., Saunders, P., Silberston, R, The Great Shutdown and its medium-term effects - a series from the Ninety One
Investment Institute, May 2020.
3. Source: Morningstar. 30 April 2020. *Peer group comprises all UCITS multi asset and absolute return funds that have a yield >4%. GMAI I Acc
YTD performance: -4.0% (-10.2). Five calendar year performance: 2019: 6.9%, 2018: 1.2%, 2017: 6.6%, 2016: 5.0%, 2015: 1.6%. Performance is net
of fees (NAV-based, including ongoing charges, excluding initial charges), gross income reinvested, in USD.
4. Borbora-Sheen, J., Stopford, J., "Dividend risk and our income strategies," Ninety One, May 2020.
5. The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more
broadly invested portfolios.
6. Charges are taken from capital and may constrain future growth. The amount of income may rise or fall. Source: Ninety One, 31 March 2020. A Inc-2 Yield = 4.8% (3.2%). The bracketed number shows
the level of yield had charges been deducted from income. For further information on yields and the figure in brackets, please see the
Important information section.
7. Mahtani, S., Morgan, D., Saunders, P., Silberston, R, The Great Shutdown and its medium-term effects — a series from the Ninety One
Investment Institute, May 2020.