Using diversified income in a high inflation environment

8 February 2022
| By Liam Cormican |
image
image
expand image

The highly unusual combination of record low interest rates and higher inflation has created a ‘conundrum’ for income investors, which is forcing them to consider uncomfortable levels of risk.

This was the view of Matthew Lemke, fund manager with boutique investment house Prime Value Asset Management.

“Interest rates have fallen yet inflation has kicked up, which is very unusual historically. There have been very few periods in time where a blip in inflation has tracked so much higher than the RBA’s cash rate,” he said.

“How long this inflation blip lasts is up for debate. But in practical terms it means investors are being forced to allocate away from cash to other markets they are not used to or not comfortable with.”

Lemke said there was a degree of discomfort among many income investors about their exposure to riskier asset classes.

“The conundrum is: do investors sit there uncomfortable with their risk exposure, or do they do something about it?

“Low interest rates have spurred returns in equities and property, but there hasn’t been as many options for reliable income returns, which are essential for a diversified investment portfolio.”

He said diversified income portfolios offered an alternative to traditional term deposits, and complement listed shares and property trusts.

“A diversified income approach delivers a solid return at a relatively low risk. The performance is delivered to investors through the quality of assets in the fund, and the diversification of assets in the fund.

“Diversification is key to providing reliable returns. The last 12 months have shown the power of diversification, as we have seen a massive divergence among COVID-19 winners and losers in investment markets.”

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

GG

So shareholders lose a dividend plus have seen the erosion of value. Qantas decides to clawback remuneration from Alan ...

2 months 1 week ago
Denise Baker

This is why I left my last position. There was no interest in giving the client quality time, it was all about bumping ...

2 months 1 week ago
gonski

So the Hayne Royal Commission has left us with this. What a sad day for the financial planning industry. Clearly most ...

2 months 1 week ago

A Sydney-based financial adviser has been banned from providing financial services in the interest of consumer protection after failing to act on conduct concerns. ...

3 weeks 3 days ago

ASIC has cancelled the AFSL of a $250 million Sydney fund manager, one of two AFSL cancellations announced by the corporate regulator....

3 weeks 1 day ago

Having divested its advice business in August, AMP is undergoing restructuring in at least four other departments amid a cost simplification program....

2 weeks 5 days ago