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To fight inflation, hunt for income

by Neil Dwane, Global Strategist, Allianz Global Investors
13 Jun 2019


Investment income provides many benefits - including guarding against inflation - but today's "safe" bonds may offer no or ultra-low returns. We suggest investors hunt for income among "riskier" income generators like corporate bonds, emerging–market debt and dividend–paying stocks.

Key takeaways

  • Inflation is an overlooked risk that can feel higher than official inflation numbers — but even 2% annual inflation can reduce purchasing power by almost 20% over 10 years
  • Slow economic growth and low interest rates mean market returns — beta — may also be low; this underscores the importance of taking enough risk to earn a sufficient return
  • Many “safe” bonds offer zero or ultra-low returns — and now that most central banks have stopped raising rates, easy and attractive cash returns are hard to find
  • Investors who “hunt for income” using riskier asset classes may be able to fight off inflation, stabilise returns and reduce overall portfolio volatility
  • An active approach to income investing can help investors search for opportunities and manage a broad range of risks

Today's investors can feel inundated with information about all the ways their portfolios can be derailed — including a steady drumbeat of geopolitical crises. In our view, many of these risks will ebb and flow over time, and they are often binary: they either happen or they don't happen. As a result, they can be difficult to hedge or invest around.

A less discussed danger is that these concerns could prevent investors from pursuing their long-term goals or deter them from taking sufficient risk in their portfolios. Some investors could even be ignoring serious risks that are less tangible, like climate change or inflation, but that can nevertheless be incorporated into an investment strategy.

Inflation can be a stealth threat

Given the relatively low levels of inflation in many economies, it's understandable why it may not be at the forefront of investors' minds. However, even small amounts of inflation can significantly erode purchasing power over time through the power of compounding. As the following table shows, a 2% annual inflation rate can reduce the value of an asset by nearly 20% in just 10 years. This is a clear example of why taking insufficient risk in low–return investments can put investors' goals at risk.


While official inflation measurements like the consumer price index (CPI) may be low, they also have inherent limitations and fail to capture the real–world experience of many consumers. In many parts of the world, health-care expenses, education costs and real estate are climbing faster than the official 2% inflation target of most major central banks. Moreover, many governments are actively trying to push inflation even higher than 2% to help them pay down their debts. US Federal Reserve governors recently suggested that they might let inflation in the US “run hot”.

Why it's important to hunt for income

To combat inflation, investors can use several approaches. Capital appreciation from equities and other real assets can be a good inflation-fighting tool, but those returns could take time to materialise. These assets can also be subject to rapid drawdowns similar to what the markets experienced in the fourth quarter of 2018.

A steady income stream, on the other hand, can be more tangible, helping to stabilise returns and make them more predictable. Moreover, the historically lower risk profile associated with income–generating investments might help reduce portfolio volatility in times of market and economic stress.

So where can investors hunt for income today? One option is government bonds — sometimes called sovereign debt — which are among the “safest” kind of income–generating securities available. But recent data by Bloomberg show nearly USD 10 trillion in negative–yielding bonds on the market, much of which is sovereign debt that we believe is unlikely to deliver a positive return.

Fortunately, there are other types of securities — including corporate bonds and equities — that may be able to generate higher levels of income in exchange for certain additional risks, and each one provides access to different parts of the corporate capital structure.

For example, the same company could theoretically issue corporate bonds, convertibles, stocks and high–yield bonds. The ability to choose where to invest along the capital structure lets investors choose which risks they are prepared to carry — while helping them target a desired level of income potential.


Using an active approach to help manage risks

Although there are many ways to generate income, there is no #8220;one-size-fits-all” solution for any investment strategy. As the accompanying chart shows, it is impossible to predict which assets will outperform at any given time. Investors should diversify across asset classes to help capture opportunities. This is where an active and global approach can help, since active managers can dynamically research and analyse these complex issues.


Similarly, just as all investing invites some degree of risk, there are certain risks that can affect income–generating securities, including:

  • Interest–rate risk: when rates rise, a bond's value generally falls
  • Credit risk: issuers could default on paying income or repaying principal
  • Inflation risk: reduces purchasing power over time
  • Liquidity risk: it could be hard to find a buyer or seller at the right time

Here too is where active management may be beneficial. At Allianz Global Investors, we take an exclusively active approach to the investment strategies we manage on behalf of our clients. At the core of our process are our global credit and equity research capabilities, which help us assess potential risks and returns across a company's capital structure. We also gain real–world insights into the issues affecting companies and consumers from our Grassroots® Research team — our proprietary in–house market research division.

With lower beta returns (what the broad market provides) likely for the next 10 years, we believe that investors should pursue alpha — or returns in excess of the market. Investors who successfully hunt for income can help protect their portfolios' purchasing power, seek acceptable returns and aim to reduce overall risk levels during uncertain times.


Grassroots® Research is a division of Allianz Global Investors that commissions investigative market research for asset-management professionals. Research data used to generate Grassroots® Research reports are received from independent, third-party contractors who supply research that, subject to applicable laws and regulations, may be paid for by commissions generated by trades executed on behalf of clients.

Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this advertisement but should seek independent professional advice. However, if you choose not to seek professional advice, you should consider the suitability of the product for yourself. Past performance of the fund manager(s) and the fund is not indicative of future performance. Prices of units in the Fund and the income from them, if any, may fall as well as rise and cannot be guaranteed. Distribution payments of the Fund, where applicable, may at the sole discretion of the Manager, be made out of either income and/or net capital gains or capital of the Fund. As a result of the payment, the Fund’s net asset value is expected to be immediately reduced. The dividend yields and payouts are not guaranteed and might change depending on the market conditions or at the Manager’s discretion; past payout yields and payments do not represent future payout yields and payments. Investment involves risks including the possible loss of principal amount invested and risks associated with investment in emerging and less developed markets. The Fund may invest in financial derivative instruments and/or structured products and be subject to various risks (including counterparty, liquidity, credit and market risks etc.). Investing in fixed income instruments (if applicable) may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions. Past performance, or any prediction, projection or forecast, is not indicative of future performance.

For funds included under the CPF Investment Scheme, investors should refer to the CPF interest rate structure from the CPF website.

Investors should read the Prospectus obtainable from Allianz Global Investors Singapore Limited or any of its appointed distributors for further details including the risk factors, before investing. This advertisement has not been reviewed by the Monetary Authority of Singapore (MAS). MAS authorization/recognition is not a recommendation or endorsement. 

All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.

Information is correct as of 04/06/2019.