Risky bonds, solid companies for a good income

Solid stocks like infrastructure and financial companies, well researched low-grade bonds and unlisted property trusts have been identified as the best investment classes for building an income portfolio.

Speaking at research house van Eyk’s annual conference in Sydney yesterday, managing director Stephen van Eyk said the ideal income portfolio would contain about a 20 per cent exposure to equities, a 20 per cent exposure to cash, a 15 per cent exposure to property, a 35 per cent exposure to fixed interest and a 10 per cent exposure to alternative assets.

On the equities front, van Eyk head of direct shares Otto Rieth, said investors should be keen to avoid volatility by investing in good quality, stable companies that perform consistently, namely banks and insurers, property, quality consumer and industrials, utilities and telcos. Resource, materials and IT companies should be avoided, he said.

Reith also recommended investors seek out short-term tax advantages like share buyback, and be aware of franking credit benefits.

He also gave a rare endorsement for presently maligned listed investment companies (LICs).

“LICs can also offer income and deliver income opportunities for the longer term investor. The caveat is that investors must buy at a reasonable price. Don’t go for yield at any cost,” he said.

On the fixed interest front, van Eyk senior investment analyst Fiona Carr said bond yields were very low right now, and that investors might have to turn to riskier fixed interest investments like junk bonds to generate income.

“Inefficiencies still exist in low-grade debt but to take advantage of these without blowing the risk budget, diversification and quality assessment is crucial.”

She recommended investors pursue a barbell strategy by supplementing high risk investments with safer, more liquid, corporate and government bonds.

Finally, on the property front, Managed Investment Assessments Anton Lawrence said it was time investors “bit the bullet on liquidity” and increased their waiting to unlisted property trusts.

He believes the listed property sector is currently over priced. He said listed property opportunities, may though, exist overseas and that Managed Investment Assessments was finalizing a review of the global RIET sector.

Lawrence also warned against construction lending and mezzanine debt, stating the risks were often too high.