6 of the Most Popular Multiasset Income Medalist Funds
It's a heterogeneous group, and the strategies appear less sensitive to rising interest rates than expected.
The environment remains challenging for investors seeking income. The 10-year Treasury yield has recovered from its all-time bottom of 1.43%, but it's still hovering in the low 2% range. Many economists have forecast rates to rise for some time now, but mid- to long-term yields might remain depressed, even after the Fed eventually hikes the short-term federal-funds rate.
Owing to the low-yield environment, investors have poured money into income-seeking funds. Multiasset income strategies have received particular interest, given their flexibility to hunt for yield across multiple asset classes with limited constraints. This Fund Spy takes a close look at the most popular multiasset income funds that receive a Morningstar Analyst Rating of Gold, Silver, or Bronze. Exhibit 1 includes all funds from Morningstar's various allocation categories with at least $10 billion in assets that have a primary objective of delivering high income and boast a Morningstar Medalist rating.
The funds are similar in that they all use tactical asset allocation and active security selection. However, because of differences in execution and geographical or asset-class boundaries, it's still quite a heterogeneous group. In fact, the six funds that made the cut fall into four different Morningstar Categories. In considering this group, investors should pay attention to three key areas of differentiation: the level of yield offered, the volatility of total returns, and the opportunity set available to the portfolio managers.
Presumably, investors have come for income, and these funds have delivered on that front. Franklin Income (FKINX) earned the highest yield over the trailing 12 months through July 2015, with a more-than 5% distribution. The other funds were no slouches; all yielded between 4% and 5% with the exception of American Funds Income Fund of America (AMECX), which still issued a solid 3.7% income return. Those results are impressive, considering that broad market index funds such as Vanguard Total World Stock Index (VTWSX) and Vanguard Total Bond Market Index (VBTLX) each yielded about 2.3% during the last year.
Of course, generating a high yield typically involves considerable risk-taking. As shown by the standard deviations and betas in Exhibit 3, investors in these multiasset income funds can generally expect moderately higher volatility than a blended benchmark consisting of 50% MSCI World Index and 50% Barclays U.S. Aggregate Bond Index and significantly higher volatility than the bond index alone.
Thornburg Investment Income Builder (TIBAX) and Franklin Income appear to be the riskiest of the group. Both strategies delivered an annualized standard deviation of 13% or higher during the last seven years, which weighed on their risk-adjusted results during that stretch. Thornburg's volatility owes to its hefty equity stake, which has grown to more than 90% of assets currently from less than 60% in early 2009. Lead skipper Brian McMahon invests more than half of the fund's stock allocation overseas--a distinguishing aspect of the strategy--which has increased volatility as of late. McMahon and his comanagers have shunned bonds because they haven't been able to find many securities with attractive yields and other strengths. The fund has earned strong results since it opened in 2002, and McMahon owns that entire record.
Franklin Income's volatility has come from a mix of stocks and bonds. Longtime lead skipper Ed Perks currently parks about 44% of assets in equities and 37% in high-yield bonds, which includes a sizable allocation to bonds rated CCC. Morningstar recently lowered the fund's Performance Pillar rating to Neutral from Positive, because it trailed its custom benchmark (40% S&P 500, 24% Barclays U.S. Credit Index, 24% Barclays U.S. High Yield Intermediate Index, and 12% Bank of America All Total Return Alternatives U.S. Convertibles Index) during the last decade. The fund's size also bears watching: At a whopping $88 billion, it likely can't take advantage of higher-yielding smaller debt issuers. Even so, the fund's time-tested process and long-tenured management make it a solid choice.
Meanwhile, JPMorgan Income Builder's (JNBAX) 11% standard deviation since August 2008 looks comparatively tame relative to the group. The fund's total return also landed near the top of the pack during that period, leading to the highest Sharpe ratio among the six competitors. JPMorgan Income Builder's team positions the portfolio with a high degree of flexibility, opportunistically shifting across a wide array of asset classes and regions to deliver high income. High-yield bonds and global equities (including REITs) have each ranged from 25% to 50% of assets, with preferred stock, convertibles, emerging-markets debt, and nonagency mortgages typically filling out the remainder of the portfolio. The management team has made some timely asset-allocation moves, such as temporarily dropping REITs in late 2007 and adding mortgage-backed securities in late 2009, which has contributed to its strong results.
BlackRock Multi-Asset Income (BAICX) earned just as strong a Sharpe ratio as JPMorgan Income Builder over the last seven years, but that period is less meaningful here. The fund transitioned to an income-oriented mandate when lead manager Michael Fredericks joined BlackRock and took over leadership of the fund in November 2011. In fact, Fredericks came from J.P. Morgan and helped manage JPMorgan Income Builder from 2009 through 2011. Fredericks manages BlackRock Multi-Asset Income with a similarly high level of freedom, investing across myriad income-generating asset classes with few constraints. He has also emphasized capital preservation in setting forth the fund's desired risk profile, though the strategy's downside protection hasn't been tested given his short tenure at the helm. The fund is a bit more exotic than the other strategies included in this article. It has the ability to use futures, options, and shorting to hedge various risks including equity, interest-rate, yield-curve, and currency risks. Fredericks also uses covered calls, which took up about 20% of the portfolio in early 2015. These positions produce income through the premiums generated by writing the call option. Fredericks opted to go the covered-call route based on the belief that investors had propped up the valuations of high-quality, dividend-paying stocks, thereby limiting their upside. The fund is off to a promising start, and its risk-conscious approach and competitive fee structure make for a solid foundation.
Last but not least, two of American Funds' strategies made the cut. Both funds turned in a standard deviation of about 12%, but they got there in different ways. American Funds Capital Income Builder (CAIBX) likely has a more volatile equity sleeve, while American Funds Income Fund of America has a riskier bond portfolio. Each fund keeps roughly 60% to 80% of assets in equities. However, American Funds Capital Income Builder balances its stock allocation about evenly between U.S. and foreign equities, the latter of which have been more volatile. That potential risk is somewhat offset by its conservative fixed-income portfolio, which holds few bonds below investment-grade. Meanwhile, as its name suggests, American Funds Income Fund of America has a domestic bias, with typically less than 20% of its equity sleeve invested abroad. That has recently boosted the fund's Sharpe ratio, as U.S. stocks have led the way. The fixed-income sleeve leans more toward lower-quality bonds, with the fund often holding around 10% of assets invested in securities rated BB or lower. Even so, the fund's yield has typically landed moderately below American Funds Capital Income Builder's. That's partly because foreign equities generally have higher yields than U.S. firms. Moreover, American Funds Capital Income Builder targets a 4% gross yield, while American Funds Income Fund of America doesn't have a specific yield goal, though it does require that all stocks offer at least a 3% dividend yield at the time of purchase.
Exhibit 4 outlines the average equity allocations of the six multiasset income funds during the last three years through July 2015 to help provide a sense of how the managers have invested their assets. The remainder of the funds' assets have consisted primarily of a mixture of investment-grade and high-yield bonds, convertibles, and preferred stock, among other areas.
What Lies Ahead
One glaring question that remains is, how will these income-focused funds perform if and when interest rates rise? In theory, one might expect the group to suffer, as rising rates create new avenues to earn income, thus making currently high-yielding securities relatively less appealing. However, recent history suggests otherwise. Exhibit 5 shows that during periods when interest rates have spiked during the last five years, these funds have fared well and posted gains, while the Barclays U.S. Aggregate Bond Index produced losses.
Rather than responding to interest-rate movements, these funds appear to be more sensitive to equity markets. The two right-most columns of Exhibit 5 show that during 2008's stock market meltdown and during 2011's midyear sell-off, all of the funds incurred significant losses. They also unanimously underperformed a 50% MSCI World Index and 50% Barclays U.S. Aggregate Bond Index benchmark, though to varying degrees. On a brighter note, all of the funds held up better than broad U.S. and world stock market indexes. Still, the funds' steep losses during equity-market downturns reinforce the point that they take significant risks in their pursuit of high yield.
In summary, when choosing among multiasset income funds, investors must strike a balance between yield and risk. Keep in mind that higher yield typically involves greater risk, so understanding a given fund's philosophy and approach to these issues is key to making a decision an investor can stick with. Exhibit 6 includes some of the key findings of this article, which investors can use to pinpoint differentiators among the strategies.
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Leo Acheson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.