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Where can you still find yield these days? Income-
oriented funds have yield, but some come with plenty
of risk, too. Of the Morningstar Medalists in this
group, the lower-risk funds have yields between
2%
and
3%
, while the high-risk options are up around
5%
.
More Income, More Volatility
When we looked at this group as a whole, we found
that the typical income-focused allocation fund lagged
a simple blended index after fees even though
income-producing securities have been bid up. What’s
more, those returns came with greater volatility.
Generating a higher yield has meant venturing into
more-specialized and volatile areas of the market,
such as high-yield bonds, foreign bonds,
REIT
s, and
even utilities stocks. Relying on racier areas of the
bond market subjects the funds to more-equitylike risk,
which has manifested in higher standard deviations.
Income-focused funds only have, on average, a
40%
equity stake, but their rolling three-year standard
deviations show that their volatilities have been more
similar to that of a
60%
equities,
40%
fixed-income
portfolio during the past
10
years through March
2016
.
Volatility for a
40%
equities,
60%
fixed-income port-
folio has been consistently lower than both.
What’s more, multiasset income funds as a group
have not justified those more-volatile results by
delivering better returns. During the past
10
years
through March
2016
, the typical income-focused
fund gained an annualized
4
.
8%
with a
9
.
2%
standard
deviation, while the
40%
equities,
60%
fixed-income
composite index increased
5
.
5%
with a
6
.
9%
standard
deviation; income funds’ lower returns and higher
volatility result in worse risk-adjusted results, as
measured by Sharpe ratios.
Income-Focused Medalists With Lower Volatility
When we rate and evaluate investment strategies,
we’re basically indifferent to whether returns come
from income or capital appreciation. As a result,
our recommended income-focused multiasset funds
stand on the usual pillars of the Morningstar Analyst
Rating—such as having experienced teams and
sound investing processes—rather than how much
yield they produce; we expect these funds’ total
returns to hold up well compared with their blended
indexes and allocation peers over a full market cycle.
Yet investors looking to draw income from their invest-
ments should focus on volatility and credit quality
in addition to total return, because they also face
sequence-of-return risk that doesn’t affect investors
who just buy and hold their investments. We have
found some keepers in this group.
We’ll tackle them in order of risk.
Vanguard Wellesley
Income
VWINX
earns a Morningstar Analyst Rating
of Gold for its great combination of fees, management,
and strategy. It’s got a mild risk profile yet has pro-
duced a five-year annualized return of
8
.
5%
and a trail-
ing
12
-month yield of
2
.
9%
. We’re also fans of
Berwyn
Income
BERIX
—a Silver-rated allocation fund. It
boasts a
6
.
5%
annualized five-year return through the
end of August and a yield of
2
.
3%
. It’s quirkier than
Wellesley but well run by experienced managers.
Moving up considerably in risk, we move to tactical
allocation fund
BlackRock Multi-Asset Income
BAICX
. The fund has a robust
4
.
8%
yield and trailing
returns of
7%
. Management buys global dividend
payers but also dabbles in high-yield, bank loans, and
option-writing strategies designed to boost yield.
Finally, Bronze-rated
Principal Global Diversified
Income
PGBAX
has a very fluffy
5
.
4%
yield and
7
.
3%
annualized returns. Needless to say, that yield
isn’t free. Management loads up on emerging-
markets debt, high yield, preferreds,
REIT
s, and darn
near anything else with a yield. Principal farms out
the work to various asset-class specialists, and so far
they’ve done a fine job.
K
Contact Janet Yang at
janet.yang@morningstar.comFunds That Use Everything but the
Kitchen Sink to Produce Income
Income Strategist
|
Janet Yang