Income investment – risky business

Investors are only now realising the inherent risks of investing for income, which has been loaded up with more and more equity and credit risk in recent years, whilst ignoring the benefits of a diversified bond allocation spread, according to a leading fund manager.

Macquarie Funds Management head of distribution Bruce Murphy said many investors learnt this the hard way after recent market volatility combined with widening global credit spreads.

“For too long investors have been lured by outright returns on income investments without due consideration of exactly what risks are involved,” he said.

According to Murphy, research produced by Macquarie in 1997 and 2004 highlighted keys risks inherent in income investing, which showed income investments being progressively loaded up with more equity and credit risk.

He also said the usual investor behaviour of ignoring long duration bonds in good times meant missing out on having an important diversification buffer in your portfolio when growth assets experience weakness.

“For people seeking income solutions without high levels of risk there are more practical solutions than just depositing cash into low yielding term deposits.”

Murphy said there had been a definite shift in the ‘bricks and mortar’ mentality as investors and their advisers begin to reconsider what a defensive investment, outside of cash, is.

“Ten years ago, many people invested in property because of its perceived security. Today, they still believe in ‘bricks and mortar’, but this definition appears to have expanded to infrastructure in the form of bridges, toll roads, airports and utilities,” Murphy said.

“Infrastructure is an asset class that can provide a combination of stable and predictable income with the potential for capital growth.”