“The hunt for yield coupled with quantitative easing has had a huge impact on yields in relatively risky asset classes,” Coombs explained.
“Even in the mainstream asset classes, we are seeing investment grade bonds yielding sub 3% and high yield at sub 5%, and liquidity and average ratings in both have dropped significantly in the past 10 years. The risk is higher but returns are lower.”
He continued: “Twenty years ago we would never have dreamt of buying an investment grade bond at less than a ‘double A’ rating for a private client. Yes, spreads might look interesting, but in terms of absolute return, returns have never been lower, and risk in terms of liquidity has never been higher.
“While we are not seeing big 1999-style bubbles, we are starting to some emerging across the income-producing asset classes – high yield, government bonds, emerging market debt, investment grade and also commercial property, which has even worse liquidity than bonds.”
It is this shifting landscape that has prompted Coombs to adopt a new perspective in an effort to move with the times, targeting yield of around 4.1% on his Strategic Income fund.
He said: “We need to be careful and focus on quality and sustainable yield that can offset the liquidity risk and the bubbles that are forming in the loans, high yield and corporate bond markets, and grow moving forward.”
This has led Coombs to adopt a heavy equity income weighting in his portfolio, which currently stands at the maximum allocation of 85%, while diversifiers and liquid assets – such as mega caps and G10 sovereign bonds – are at their respective minimums of 5% and 10%.
However, while he is cautious on diversifying assets, he believes that liquid assets still have an important part to play.
“Diversifiers in the income world are far more risky than in equities,” he expanded. “We are at the riskiest that we can be in our portfolio, which says it all about where you need to be in order to drive sustainable income.
“While returns in liquid asset classes may not be very high, they still have an active role to play in a multi-asset fund. If every asset is going up at the same time, while you may have diversification of return, you do not necessarily have the right diversification of risk – the whole point is to have a portfolio of low-correlated assets to drive smooth returns and reduce drawdown for clients.”
