It is not an easy time to be an investor. After barely recovering from the pandemic, economies around the world are now facing high inflation and rising commodity prices, while dealing with the fallout from the Russian invasion of Ukraine.
Supply chains continue to be disrupted by these events, and central banks have begun to hike interest rates. All these uncertainties have affected market returns, leaving investors struggling to find income-paying instruments in an inflationary environment.
Within Malaysia, investors also had to contend with the currency depreciation, foreign funds outflow and uncertainties relating to the growth trajectory of China, who is one of the country’s main trading partners.
“At this point, it is important for investors to have a diversified portfolio, with some income-distributing investments”, says Ng Chze How, Head of Retail Wealth Distribution at Manulife Investment Management (M) Bhd.
These tend to give investors protection during market shocks and volatility. Solutions such as preferred securities, multi-asset, fixed-income or real estate investment trust (REIT) funds seek to provide investors with a regular source of income.
“This is something especially important for retirees, as they generally have to rely on their savings in the absence of a salary from paid employment. A steady investment income can also create a potential ‘alternative salary’ by reversing the net cash outflow situation,” says Ng.
Those with established careers or younger people may be more focused on capital gains. But the income-paying assets can benefit them if they reinvest the income to achieve potentially greater returns, he observes.
“Besides acting as an additional cash source, income-focused investments help to reinforce effective wealth management. It is common for investors to neglect wealth management due to their hectic work schedules or lifestyles. Investing in assets that offer regular dividends can provide a cordial reminder when payouts are made,” says Ng.
“This has the effect of highlighting any idle assets and, consequently, the need to review the investor’s portfolio. In such a case, the investor can then decide whether reinvestment is required. This is a cycle that allows people to be disciplined investors.”
There are a variety of income-generating assets with differing risk and volatility levels. Apart from bonds and equities, there are income funds, or unit trusts that typically aim to distribute dividends at regular intervals.
The dividend yield of these income funds is generally not guaranteed. “But as is the case with any diversified portfolio, the likelihood of every holding failing simultaneously is small,” says Ng.
These funds typically earn an income from investing in high-dividend stocks and interest-paying bonds, which are then distributed to investors. When the fund pays investors a dividend, the net asset value of the fund will be reduced accordingly.
A more non-traditional source of income is REITs, which are legally obliged to distribute the majority of net income after tax as dividends, or REIT funds. REITs are defensive, provide regular dividend income and tend to be a good hedge against inflation.
Manulife Investment Management has several REIT funds available. This includes the Manulife Investment Asia-Pacific REIT Fund and Manulife Shariah Global REIT Fund. Both currently offer compelling propositions due to the post-pandemic economic reopening in many countries, Ng observes.
“We believe that higher inflation and an increase in interest rates driven by economic growth is a net positive for physical assets. Under these circumstances, real estate fundamentals remain supportive, and the sector provides a great opportunity for an income investor to consider as a hedge against inflation,” he says.
“As Covid-19 cases have stabilised in recent weeks, we continue to believe that a synchronised global reopening should provide further upside for REITs, especially in the retail, office and hospitality sectors.”
In Asia, excluding mainland China and Hong Kong, the fundamentals of REITs are driven by the synchronised reopening theme. This instils confidence for better rental rates and occupancy outlook for Asia-centric REITs, says Ng.
“The certainty and visibility of the income from REITs continue to appeal to investors, especially during times of heightened volatility across both bond and equity markets,” he adds.
From a regional perspective, Manulife Investment Management favours the US, Australia and Singapore markets for their attractive valuations and distribution yields. It sees investment opportunities in industrial, retail, healthcare and technology-related REITs.
“We have minimised our exposure to Japanese and the UK REIT markets, based on their relative distribution yields and valuations,” says Ng.
When investors choose income-generating assets, they must understand that the dividend yield is not the sole indicator, says Ng. They must also consider other factors such as risks. “While some funds offer an attractive dividend income, this should not be used as the sole indicator in that fund’s selection.”
Instead, investors should pay attention to the total returns, where dividend return is combined with a change in fund prices. This would provide investors with a more comprehensive picture.
Ultimately, investors who want to generate income from investments can create a portfolio that provides multiple income streams. For instance, a retirement portfolio and education portfolio for the children can invest in funds that provide quarterly or semi-annual pay outs. This can be complemented with a lifestyle spending portfolio that gives yearly pay outs.
They can seek advice from wealth managers such as Manulife Investment Management to build these portfolios. Manulife Investment Management also has an online fund investment platform called Manulife iFUNDS, which allows investors to open an investment account with an advisor virtually. Investors can also monitor their investment portfolio via the platform.
For more assistance and guidance, investors should look for Manulife unit trust advisors, who will be able to give personalised advice based on the investor’s needs.
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