In recent years, traditional investment income sources such as certificates of deposits (CDs), bank savings accounts, and government bonds no longer generate a meaningful income source for investors. The decline is in part due to the Federal Reserve holding their benchmark rate (the Fed Funds rate) near zero since the Great Financial Crisis 0f 2008 and again during Covid shutdown of 2020 in order to spur economic activity. The chart below shows the decline in yields for the 10-year US Treasury (Maroon Line) and the Fed Funds rate (gray line)1.
If investors are looking for higher yields in the current low-rate environment, they will have to seek an alternative approach which may include allocating to non-traditional sources of yield. The Gradient Absolute Yield Portfolio is a strategy that seeks to solve the problem of low yields by investing in attractive, high yield opportunities across a diversified mix of asset classes and securities. The primary objective is to deliver a relatively high level of income versus traditional fixed-income solutions. The portfolio will have exposure to five key categories:
- Dividend-Paying Equities – Stocks of global corporations that pay high dividends
- Real Estate Companies & Trusts – Derive income from real estate transactions, mortgages, and mortgage debt
- Preferred Stocks – Hybrid security between common stock and debt that pays a dividend
- Master Limited Partnerships (MLPs) – Natural resource-based entities involved in transporting and selling these resources
- Fixed Income – Bonds of corporations and foreign governments that typically carry higher yields than US Treasury bonds
As a multi-asset portfolio, it can freely move between the five asset classes listed above to seek higher income levels across the globe, which achieves broad diversification and lowers volatility. Additionally, the categories listed above have several sub-categories that give the portfolio management team the ability to target specific opportunities that appear more advantageous than another. The current allocation of the Absolute Yield Portfolio is shown below.
As mentioned, the Absolute Yield Portfolio seeks to provide a higher level of income than traditional fixed-income assets. The focus of the portfolio management team is to provide a consistent and recurring income stream for investors and not necessarily focus on capital appreciation, unlike many stock portfolios. The graph below on the left shows the annual income based on a $100,000 and the graph on the right shows the annual performance of the portfolio. Income is consistent around $6,000 per year, but the total return (capital appreciation plus income) is much more variable with positive and negative return years.
The right chart above shows that investors need to be willing to accept additional volatility as returns can vary from year-to-year. Historically, the higher returns or yields that are desired, the more risk is needed to achieve those goals. The Absolute Yield Portfolio utilizes assets that exhibit greater risk than a certificate of deposit (CD) or government bonds to achieve higher income levels.
Finally, investors may need to think differently about traditional fixed-income portfolios with the current low-interest rate environment. Investors considering the Absolute Yield Portfolio should be willing to diversify from traditional incomes sources such as government bonds and CDs to generate an enhanced level of income. They should also understand the short-term market fluctuations that come with taking additional risk and how it might affect their overall portfolio and financial plan.