As investing for income evolves in the future, so do its risk trade-offs. Dr. Brian Jacobsen provides insights in this second part of a three-part series for income seekers.

Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. As investing for income evolves in the years ahead, so do risk trade-offs. That means evolving our understanding of what to expect when investing for the next generation of income. Here to help is Dr. Brian Jacobsen, Senior Investment Strategist with the Wells Fargo Asset Management Multi-Asset Solutions Team. Brian, welcome to the program.

Brian Jacobsen: Thank you so much for having me.

Laurie: In the first of this three-part series we discussed, “Three ideas for seeking income in a low-yield environment.” We learned that yield from income has been a more stable means of return compared to price appreciation, and that’s good.

But we also learned seeking income means casting a wider net, and that’s why we’re having this conversation. And this episode ties back, Brian, to your February 15 AdvantageVoice® blog post, “What’s next for yields? The trade-off for income-seekers,” where you wrote, “The yields most people grew up with are not the yields most people will grow old with.” That’s a bold statement. Why?

Brian: I think one of the biggest reasons is that we’re almost starting from very different initial conditions. I looked at data going back to 1919 to create some of the charts on the blog, and it was a period of time in which you had fairly decent growth, but it was volatile growth—lots of ups and downs. You also had higher inflation and pretty volatile inflation. And as a result, yields reflected some of that uncertainty. Well, we have gone through a lot of the 1980s and 1990s, which were known as “the great moderation” in economic circles. Growth was a little more stable. But more importantly inflation was put on a downward trajectory that persists through today, and it also became more stable. So we have a little less risk associated with inflation and growth, and yields are reflecting that. A lot of it I think is because economic policy—whether it’s monetary policy or industrial policy—is just a lot different today than what it ever has been.

Laurie: So, where’s your team looking for the next generation of income?

Brian: I think the next generation of income is really going to be about scouring the surface of the planet for investment opportunities.

It’s really not about your traditional approach to investing for income, which was having a mix of, maybe, dividend-paying U.S. stocks and high-yield U.S. fixed income. I think it’s going to be more about looking for those global opportunities, and also in different types of asset classes—like real estate investment trusts or master limited partnerships—so slightly different structures, but also in different geographies.

Laurie: But you’re not saying to stop looking at the traditional places.

Brian: No. I still think that the traditional places have a good role to play in a portfolio. It’s a big chunk of the investment universe—especially investing for income.

Part of my argument is that I think people should just lower their expectations for the type of income their portfolios might generate. It’s just that maybe we need to re-frame the way we think about looking at yield—think about it in real, inflation-adjusted terms as opposed to just nominal terms. And then also, how can you add some of these alternative sources of income as a compliment to your portfolio. I think that’s really a way to think about some of these diversifiers to an income-oriented portfolio. Think of them as compliments as opposed to substitutes.

Laurie: Well on that note, there’s an interesting chart in your post that puts the risk trade-offs into perspective.

Brian: Yes. So what the chart tries to show is that if you look at current yields on a lot of different income-oriented investments, you’ll see that some are fairly low, like on the S&P 500, and some of them are fairly high, at least from a relative perspective, things like master limited partnerships. But, as you can imagine, with that higher yield also comes more variability in that yield. And so that’s another dimension to think about when diversifying a portfolio. Sometimes, stretching to grab those higher yields can introduce more variability to that income stream. So it really is about a trade-off.

Laurie: And I think you even called it the “significance with stability approach,” looking for significant income that is stable as being an essential step for building a portfolio in a risk-managed way.

Brian: Yeah. We think clients are really looking for significant income but they want it to be sustainable, more reliable, which fits very nicely with how we look at managing portfolios and building portfolios. It’s about risk management from top to bottom, really, up and down the whole process.

Laurie: Thank you very much for explaining that. So there certainly are income opportunities to be found, but you’re saying it’s the expectation that putting a portfolio together is going to be more nuanced in the years to come.

Brian: I think that’s a good way to summarize it. Some of the traditional methods might be OK, but I think we can do better than OK.

Laurie: That sounds great, we all want to do better than just OK.

I’ll remind our audience to visit our blog AdvantageVoice® to stay informed on this topic as well as many others. But for now, Brian, thank you very much.

Brian: Thank you, I really appreciate it.

Laurie: Until next time, I’m Laurie King; take care.


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