‘Mind the Gap’
High grade corporate bond yields surpass dividends for first time since the GFC.

cover page mind the gap
Matthew Swartz
Written by

Matthew Swartz

Senior Portfolio Manager

Sep 28th, 2023
Related topics

For too long, yield hungry investors had been pushed further and further up the risk curve to find adequate yield on their capital. For self-funded retirees looking to generate sufficient income from their nest-eggs, the equity markets had really been the only game in town. But the cycle has shifted, and investors need not put as much value at risk to achieve healthy income streams.

Shifting Cycles – Equity yields have peaked!

corporate bond yield vs Australian Funds yield

Source: Bloomberg/Lincoln

The economic impacts of tightening interest rates and persistent inflation is pressuring profit margins and dividend payments. Most evidently, the cycle for super-sized dividends in the resources sector has now passed. The combination of lower commodity prices, inflation cost pressures and increasing capital expenditure requirements has seen the mining-majors BHP Billiton and Rio Tinto reduce their dividends by c30-50% on the previous corresponding period.

We expect the trend of reducing dividends payout ratios and lower profitability to continue to drag dividends yields in the upcoming period and as such our active portfolio management approach in the Lincoln Australian Income Fund has led us to tactical asset allocation.

Active Yield Management

With fixed interest finally offering compelling yields, the Lincoln managed investment teams have acted decisively and transitioned 30% of its capital down the risk curve into financially healthy corporate bonds.

Unfortunately, most retail investors can’t position their exposure directly in ‘over the counter (OTC)’ instruments like corporate bonds.

Searching for the right manager that can align yield requirement with risk management is crucial in these shifting economic cycles.

Reducing Equity Volatility

In addition to increasing our portfolio’s exposure to fixed income securities and diversifying our asset allocation, the Fund team took advantage of the market rally in August to further mitigate risks associated with the equity component of our portfolio. This risk reduction initiative involved selling futures contracts, effectively tempering the day-to-day volatility within our portfolios.

To clarify, our unitholders will still benefit from our stock selection strategy, and any exceptional performance by our selected stocks during reporting periods will be reflected in the unit price. However, if the broader markets experience an upswing, we may not capture the full extent of that upside. On the flip side, and more importantly, our unitholders enjoy protection in the event of a share-price correction.

Despite adding protection and reducing the risk profile for unitholders, the underlying yield dynamics of our portfolio remain compelling. The Fund continues to produce strong income for its investors and pay regular, quarterly distributions.

In times of uncertainty, it is crucial to have confidence in your investment allocation. Our team of experienced portfolio managers has successfully navigated through various market cycles. When the yield dynamics of assets are in flux and macroeconomic risks obscure the earnings horizon, you need active portfolio managers equipped with the necessary tools to position to current market circumstances.

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So, get exposure to our high yield strategy today with peace of mind and protection.

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Information in this communication is current as of publication unless otherwise stated. It is provided for educational purposes only and may not reflect current market data or opinion. It should not be relied upon in respect to any current investment decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Important: This communication is provided by or on behalf of Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 for information and educational purposes only. This content may contain general financial product advice. It has been prepared without taking account of your personal circumstances and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. Investments can go up and down. Past performance is not a reliable indicator of future performance. Shares and other investments may go up and down in value, and their past performance may not be repeated and gives no guarantee of future performance. Information in this communication was current as at the date of its preparation, unless otherwise stated, and may be subject to change.

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