Three fresh ideas to earn income and build wealth

PM says 60-40 model is outdated and new strategies are required to counter confusion and fear of 2008 repeat

Three fresh ideas to earn income and build wealth

The times they are a changing – and new ideas are needed to both earn income and protect wealth.

That’s the message from portfolio manager Greg Taylor, of Purpose Investments, who said that, while this lengthy bull market has not always been easy to ride, investors have been nicely rewarded.

In the first 10 years, 60-40 portfolios generated a solid return of about 9.6% a year, with Taylor admitting this was "not bad at all" for a business school strategy less risky than investing purely in equities.

However, Taylor said confusion and concern are popping up more easily than in recent memory and people are wondering whether another 2008 is on the cards.

At the root of this confusion is that many central banks haven’t been able to “normalize” interest rates, with the latest round of easing starting from historically low levels.

Taylor said: “Combined, these factors make it difficult to imagine a return to higher yields anytime soon. In fact, most economists are expecting interest rates could be even lower a year from now. No one is calling for a return of 5% bond yields in the near future.

“Projected low bond yields are bad news for anyone that’s too dependent on their 60-40 strategy. That portfolio mix wasn’t built to succeed on low bond yields, and contributes to why this ‘modern’ portfolio strategy feels increasingly out of date today.”

So what does that mean? Taylor believes portfolio managers have to think beyond what they’ve traditionally done in order to avoid fears and worries seeping into your strategy.

He splits this into three areas of action - the first being that when uncertainty gets high, go for a lower correlation.

He explained: “Reducing your dependence on both fixed income and equities for returns is a good way to build some stability into your portfolio. A lower-correlation strategy, like one that sells put options and effectively sells insurance to other investors, lets you build a new return stream that gives steady income without being tightly tied to the equity market. More good news, it often works even better when volatility is high.”

To back it up, he said the Purpose Premium Yield Fund’s beta, a measure of volatility relative to the broader market, is just 0.22 and that in 2018, it gained 2.07% even while the S&P fell 4.39%.

The second tool money managers can utilize is tapping into the power of private debt, adding alternative asset classes to give you a meaningful protection against market turns while generating a high, stable yield at the same time.

Taylor said: “It’s win-win and can be a much-needed stress reliever if you’re feeling stuck on finding new approaches. Private debt is the perfect way to test the waters. Because it’s less liquid than the public fixed income and equity markets, there’s a bigger chance for a better risk-adjusted return through the liquidity premium.”

The final move to stave off the bad times revolves around the idea that the best offence is a strong defence and that, instead of a brand new strategy, adjusting equity and fixed income allocations is the way forward, although this is a challenge with all the noise right now.

Taylor said that, overall, change can be uncomfortable but pointed to how pension funds have adapted.

He said: “When it comes to doing things differently we can take inspiration from pension funds. They’ve been ahead of the curve on this problem, and some of the biggest ones changed their investment models years ago.

“Instead of sticking blindly to the traditional 60-40 portfolio, pensions have proactively added new alternative assets and strategies like private debt, options overlays and hard assets. They’ve successfully helped conquer the uncertainty of relying on old models, just to meet their current obligations, without a longer view of the future.

“Pensions have unique objectives. Just like you. Just like every individual investor. Uncertainty poses challenges, but there are new options to address it that you might not have thought of yet.”