BlackRock portfolio manager Justin Christofel said finding sources of income is becoming exceedingly difficult for investors.
“For those concerned with capital preservation, this can be an alarming prospect,” he said.
Mr Christofel pointed out that traditional fixed income yields are on average less than half of their pre-GFC levels.
“The universe for yield has shrunk. Investors today are taking on two to four times the amount of risk they were a decade ago to generate the same levels of income.”
Mr Christofel noted that in 2007, 100 per cent of global fixed income products yielded over four per cent. Currently, the proportion sits at 20 per cent. The products account for that 20 per cent are also found in riskier corners of the market, he said.
“[There is] quite a bit of risk for investors to take on to generate the required yield, particularly when it is considered that these sectors exhibit significant left tails in market downturns.”
Mr Christofel continued: “In other words, when markets go bad, these investments tend to do significantly worse.”
He said investors need to look at non-traditional credit as an answer.
Non-agency mortgages, collateralised loan obligations, commercial mortgage backed securities and preference stock are assets Mr Christofel marked as favourable.
“Although some of these are considered high risk, it is possible to access segments of these markets in a high-quality way to provide a consistent return stream.”
He added: “That means you will give up some yield relative to a pure high yield exposure – which is going to include some of the riskier more distressed parts of the market – but with our strategy we think that is a good trade off.”
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