Fixed-income expert on the predicament for savers and why the three ways to increase income feature substantial risks for retirees
Investors have been urged to adjust their expectations as we enter a tough period for income. Retirees, or the soon-to-be retired, have been placed in a predicament by low interest rates, with many warned not to overreach for yield.
Matt Brill, Invesco’s Senior Portfolio Manager and Head of North America Investment Grade, believes central banks have created a paradox. In part two of his interview with WP, he said that with rates so low, investors have effectively been told they should be a borrower, or at least spend and not sit on heaps of cash. However, if you’re a retiree and your income has been halved, you actually need to save more.
Brill said: “If you're a saver, this is terrible for you. It just makes you become more of a saver, and you have to adjust your budget around it. The mistake that some individuals will make is that they will reach for yield because they have a set standard of income they're expecting, and in order to hit that they have to take on more risk.”
He explained three ways to get more yield. The first is to take more credit risk, something Invesco feels comfortable doing to a degree right now because the economy's good but a strategy that advisors should be under cautious with when thinking about elderly clients.
The second option would be to add more duration so you have a steeper yield curve, which is not ideal when there is likely to be more inflation. The last option would be to take on illiquidity or less liquid bonds, which usually pay more yield.
Invesco has added some less liquid securities, up to 5%, and it has taken on a little bit more high yield credit risk. It is unwilling, however, to take on more duration risk.
“Put all that together and you have to adjust your expectations,” Brill said. “Corporate credit [represents] a greater opportunity than government securities but for Canadians and Americans, there's more yield here than anywhere else in the world. If we think that we have a yield problem, go over to Japan or Europe, where they have negative yields.”
He added: “I hate to tell people they have to adjust their expectations but that's really, in my opinion, a better thing to do rather than to try to reach for yield to keep the same [levels] you had in the past.
“If you do that, you're taking on one of those three risks. I'm more comfortable with some than others. I'm certainly not comfortable in duration right now, and I wouldn't be comfortable for mom and pops to put on a lot of credit risk, because that's not what they're expecting out of their fixed income.”