Topic: Featured, Investing, Investing for Yield, Retirement Planning

Is your retirement income secure in bonds?

secure retirement incomeIt used to be, a secure retirement income was generated from a balanced portfolio of stocks and bonds. Bonds were the stabilizing force that provided income and offset equity risk. And for more than two decades, bonds have provided excellent returns.

But with interest rates rising, the outlook for bonds has turned sharply negative. (As bond yields rise, prices fall.) We’ve already seen the impact following a spike in rates late last year. During the month of November, the bond market lost $1.7 trillion globally, the worst month for bond investors on record.

The reality is that investment-grade bonds today provide meagre levels of income, while the risk level has arguably never been higher, as interest rates begin to normalize.

In fact, at this stage of the cycle, investors could well ask, “why own bonds at all?”  One reason might be lack of alternatives but we would disagree.

For investors who are thinking pro-actively, there are a host of alternative yield-oriented investments that complement traditional bond and stock portfolios. Below are three asset classes we are currently invested in to deliver steady retirement income for our clients.

High-Yield Bonds
One alternative has been high-yield bonds, securities with lower credit ratings than investment-grade corporate bonds and therefore offering higher yields (e.g. 6.01% currently).

Issuers of high-yield debt are often younger companies or capital intensive businesses with higher debt ratios. While further up the risk curve, high-yield bonds are an established asset class used by many institutional investors to enhance yield and offset other risks in their portfolios.  

High-yield bonds were the darling of 2016 – even outperforming the S&P 500 Index. Our yield portfolios benefited from the buying we did back in late 2015 and early 2016. But at current valuations most of the gains have been made. We will continue to hold them for their coupon and watch valuations closely.

Private Debt
The private debt asset class came onto our radar following the 2008 financial crisis, when traditional lenders (i.e. banks) dramatically reduced their mid-market lending to focus on repairing their own weak balanced sheets. This created an open market for private lenders and an attractive investment for opportunistic investors.

Private debt is attractive because it offers potentially superior returns over traditional fixed income with low correlation to other asset classes.

We currently have $80 million committed to private debt investments – well diversified by specialist manager, geography, economic sector (e.g. health care, energy, industrial, etc.) and company size. We expect to increase this in 2017 as the opportunity arises.

Preferred Shares
We also progressively built a position in preferred shares beginning in 2015, when the market sold off.  Fast-forward a year later, preferred shares rallied strongly in the fourth quarter of 2016. They currently offer a high relative yield (in the form of a fixed dividend); greater security than common stock; and modest capital appreciation potential. We expect preferred shares will also do well in 2017, as they typically perform well in a rising rate environment.

There are other income-producing alternatives, such as private real estate and mortgages that we include in the portfolios we manage for clients seeking retirement income.  We favour this approach of investing in alternative assets to complement traditional stocks and bonds because it has been shown to produce enhanced returns with lower volatility.

While alternative investments are the norm among the ultra-wealthy and large institutional investors (i.e. pension plans), the challenge for individual investors is how to access them. This is why we formed Newport Private Wealth back in 2001 – to give individual investors access to the ways and means of the top echelon of investors such as: true diversification across multiple asset classes, access to specialist money managers for these asset classes, with stewardship and oversight by a formal Investment Committee aligned and accountable to the client.

You can read more about our investment process on our website.