Schroders: Success of income investing lies in long-term sustainability

In a world where interest rates in developed economies are at rock bottom and a rate rise in the US is just around the corner, there has been a flurry of commentary about how investing for income is not suited to the times. But this parochial thinking ignores one major factor; the long-term sustainable and consistent income, as well as capital growth, that this style of investing can deliver.

No doubt, generating income when yields are at historic lows is no longer as simple as investors believed it once was. However, it’s important to look past the short-termism of what investment style is in vogue and seek out the longer-term benefits of any approach. In this sense, the multi-asset income approach to investing takes advantage of a number of trends that have transpired over the past decades.

Watch out for the 3Ds
For a more well-rounded perspective on why this is, look no further than the 3Ds; Demographics, Deleveraging and Decelerating growth.
Firstly, the world’s demographic data are forcing investors to study the viability of income investing. In 2000, the world had around 600 million people aged 60 or over. However, as longevity increases and former large and youthful populations start greying (think China) this number is set to surge to nearly 2 billion by the year 2050. As working age populations dwindle, people retire and life expectancy increases, the demand for consistent and sustainable income solutions will rise. This trend is already evident in companies’ tailoring of services to the ‘silver dollar’ and the investment industry is no exception. 

Secondly, although consumers in developed economies are deleveraging and paying down debt, the reality for governments is an entirely different matter. Private debt has effectively been transferred to the public sector as developed world economies have taken on a staggering amount of debt, highlighted by the example of the US, where total (corporate + government) debt as a percentage of GDP has hit 350%. Collectively, this suggests global deleveraging is going to play out over the longer-term and, as a result, growth is going to remain laboured. This in turn will mean terminal interest rates (a measure of long-term rates) are likely to be below historical aggregates. Furthermore, the number of high-yielding safe government bonds is in short supply.

Thirdly, decelerating global economic growth is going to make earning a decent return from capital gains in an investment portfolio all that much harder, as well as less predictable. And in the current deflationary environment, where real interest rates have dipped into negative territory, income will continue to remain an important source of returns for investors.

These three important trends will sustain and grow demand for income investments over the long term. More crucially, these 3Ds are structural shifts that will endure and will therefore require long-term planning in both sustaining income as well as growing capital in investors’ portfolios.

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