Today’s environment has become increasingly challenging for investors that are reliant on income generation. Economic growth in the U.S. and abroad remains sluggish, valuations for both fixed income and equity securities have become less compelling, forward return expectations are relatively muted, and interest rates along with bond yields remain near historically low levels.
Against this backdrop, income generation opportunities have become scarcer and finding suitable investment options that meet the needs of today’s income-oriented investors has become more challenging. At Manning & Napier, we understand that reaching investment objectives utilizing the more traditional approaches available for income-oriented investors (e.g., a simple balanced portfolio consisting of 50% stocks and 50% bonds) has become difficult. Furthermore, simply reaching for the highest yielding securities in an effort to generate a stronger income stream is risky, as higher yield is typically reflective of higher risk. With all the challenges that currently exist, it is important to consider alternative portfolio options that seek to provide sustainability of income and aim to meet investor needs over time.
Manning & Napier’s Strategic Income Conservative and Strategic Income Moderate Series are multi-asset class portfolios that seek to address the challenges in today’s market environment and act as alternatives to the more traditional yield-seeking strategies found in the marketplace. The Strategic Income Conservative Series is intended for investors who have current income needs, a shorter investment horizon, and less ability to withstand market volatility. The Strategic Income Moderate Series is intended for investors who have current income needs and a relatively long investment horizon.
There are four considerations that play a key role in the management process of the Series, which we believe are necessary for income-focused investors navigating today’s environment:
- Duration management
Duration is a bond’s price sensitivity to a change in interest rates expressed as a number of years. Bonds with longer durations are more sensitive to interest rate changes than bonds with shorter durations. In a rising interest rate environment—such as what we may experience going forward—longer duration bonds could experience heavy losses, especially if interest rates spike. Conversely, shorter duration bonds are less sensitive to rising interest rates and can help mitigate losses resulting from higher rates.
- Credit management
Moving beyond the relative safety of U.S. Treasuries may be a viable option for investors seeking to increase current portfolio yield. Credit investments can include corporate debt options ranging from investment-grade to high yield. Utilizing high yield debt in a portfolio can be an important tool, but the key is using it in the proper manner at the right time. While high yield fixed income securities have historically provided strong returns, the potential for significant losses within this asset class is a reality that investors could face at various points in the market cycle. This necessitates an active approach to managing credit exposure, weighing the risks and opportunities that characterize the prevailing market environment.
- Equity dividends
An allocation to dividend-paying stocks can be another important tool utilized by investors who are looking for alternative ways to generate income, as dividends have played a meaningful role in overall stock returns over the long run. Not all dividend-paying companies are equal, however. It is important to have a framework for evaluating the merits of individual companies from an income perspective, as well as more importantly, from a fundamental investment perspective. Investors should look for companies with sustainable dividends, growing dividends, and/or special
situations (e.g., income-generating securities that are compellingly valued due to unique market conditions).
- Diversification into other income sources
Real estate in the form of Real Estate Investment Trusts (REITs) can provide another source of income for investors. REITs are required by the IRS to pay out at least 90% of their income to shareholders, meaning REITs can provide higher yields than those typically found in the traditional fixed income markets. Another one of the attractive elements from a diversification perspective is that real estate may provide a natural hedge against inflation, as rents can be reset higher in an improving, inflationary economy. REITs are certainly not risk-free, so it is important to be selective when targeting the sector.
We believe that taking these key considerations into account when managing the Strategic Income Conservative and Moderate Series enables us to manage risk for our clients while pursuing both growth and income generation opportunities. Diversifying beyond the more traditional income-oriented approaches can provide attractive alternatives to investors looking to generate income in today’s yield-starved world.
Manning & Napier Fund, Inc. offers a comprehensive suite of products.
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For more information about any of the Manning & Napier Fund, Inc. Series, you may obtain a prospectus at www.manning-napier.com or by calling (800) 466-3863. Before investing, carefully consider the objectives, risks, charges and expenses of the investment and read the prospectus carefully as it contains this and other information about the investment company. For regulatory purposes, not all Series are offered in all states.
A Word About Strategic Income Series Risk