When people say yields are low, I always like to ask, “Which yields?” As we discussed in last week’s blog post, while yields are low—both in nominal and inflation adjusted terms—there is still decent income to be found. In my opinion, the trick is to look for income by casting a wider net: look across asset classes and geographies.

When it comes to fixed income, the U.S. still looks like a relatively high yielding country, at least compared to places like Europe and Japan.

Image

Index definitions

Comparing countries is a tricky business, though. Consider the effects of currency. For example, as of 2-19-2018 in the forwards market for the Japanese yen, a U.S. investor could have effectively locked-in a:

  • 2.8% appreciation of the yen over the next year
  • 3.0% annualized appreciation over the next two years
  • 3.3% annualized appreciation over the next five years

Adding the currency effect can make even meager yields in Japan look relatively less unattractive. Similarly, for the euro, a U.S. investor could have locked in a:

  • 2.9% appreciation of the euro over the next year
  • 3.0% annualized appreciation over the next two years
  • 2.7% annualized appreciation over the next five years

I think it is somewhat misleading to say the U.S. is a high-yielding country versus other regions, when you factor in foreign exchange effects. After adjusting for these effects, a lot of the yield advantage in the U.S. goes away. That’s why it still pays, in my opinion, to look globally for fixed income opportunities.

Fixed income isn’t the only place for income. Equities can generate a substantial portion of their total returns from dividends, as noted in my recent blog post on decomposing index returns into two components: income and price.

And, as with fixed income, knowing where to look for income is an important step.

As of 2-19-18, three industries in the U.S.—telecommunications, utilities, and real estate—were the highest dividend-yielding sectors of the MSCI USA Investable Markets Index (IMI). Investors who are seeking income might be tempted to stop their search right there, or even overweight a position in the three industries. Why? Domestic equities often feel more familiar, and therefore enable a sense of comfort that could lead an investor to exclude global markets from their range of options. This is a scientifically studied behavioral trait called “home bias,” and it’s a common investing pitfall.

This is where broadening one’s investment horizons can uncover something unexpected and perhaps valuable. To get more geographic diversification and better sector representation, adding non-U.S. equities—both developed and emerging markets—can help.

Image

 

In the MSCI World ex-USA IMI index—which represents developed market non-U.S. exposure—energy, utilities, and financials are the highest dividend-yielding sectors. In the emerging markets, as represented by the MSCI Emerging Markets IMI index, the materials and telecommunication services sectors are the highest dividend-yielding sectors. Relative to a broadly diversified global equity portfolio—with the MSCI ACWI IMI index as the proxy—it is possible to create a better-yielding portfolio with broad sector representation, provided investors are willing to look across different geographies.

Considering foreign exchange effects, the diversity of fixed income opportunities, and the span of dividend potential around the globe, there seems to be little reason for investors to hold onto their home biases where they overweight investments issued in their home countries. While income opportunities might not be that big, they can look a lot better if you take a global perspective.

Dr. Brian Jacobsen, CFA, CFP, is a Senior Investment Strategist with Wells Fargo Asset Management Multi-Asset Solutions.

 

309349 0218

0
0

You might also like: