Large institutional investors in Asia and Europe are looking to broaden their allocation to income-generating assets beyond traditional government bonds, a new study of reveals.

Allocations to investment grade and high yield bonds, equity dividend-focused strategies and real estate will increase over the next five years, the authors of The Age of Income predict.

The research, carried out among Fidelity Worldwide Investment’s institutional investors by Greenwich Associates, reveals that investors are increasingly focusing on receiving regular investment income, followed by the opportunity for capital appreciation.

Fidelity’s global head of institutional business, Chris McNickle, says that the ructions of the financial crisis and subsequent market volatility have reduced investor confidence in the likelihood of capital appreciation.

“This has increased the importance of income, but it comes at a time of historic low interest rates and a sharp rise in the perception of the risks involved in certain investments traditionally associated with income generation,” he says.

“So, investors are searching for income in other places – within asset classes and across them. Investors are showing increased demand for equities of strong companies that pay high and sustainable dividends.”

The survey of 52 institutional investors shows that the majority of these investors expected to increase asset allocation over the next five years to investment grade bonds in the US and Europe.

This was followed by emerging market investment, equities and infrastructure.

“The search for income – already a powerful investment theme – is set to grow in importance over the next decade and beyond,” the report’s authors find.

 

Higher yield, less risk?

Researchers say that the low interest rates and bond yields are encouraging this search for yield as well as the need to buffer against ongoing market volatility.

“We believe that the current market environment offers an opportunity to access attractive yields without necessarily taking on significantly more risk in fixed income portfolios, quality-focused equity-dividend portfolios and commercial real estate portfolios,” the authors find.

Over the next 25 years the authors predict that the shift in investment strategy will involve:

  • A preference for income and rising payout ratios
  • The search to contain volatility and stable yield
  • A preference for deleveraging and saving
  • Reassessment of risk and a focus on total return.

The researchers warn that the desire for income-generating returns will also be driven by demographics, with baby boomers retiring and looking to shift from growth assets into safer income-generating ones.

This growing demand is likely to bid up the price of income-generating assets as the global retirement population surges from 800 million in 2011 to 2 billion in 2050.

The sharp increase in retirees is accompanied by a growing life expectancy, with this generation of developed-country retirees expected to live well into their 80s.

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