FIXED INCOME
Go global for higher income opportunities
UK-based investors traditionally turned to domestic equities, bonds and property for generating income but have faced growing challenges in recent years. Many equity dividends were cancelled amid the pandemic, for example, while multi-decade highs in inflation and central banks in rate-hiking mode have created a particularly difficult backdrop for fixed income.
These events serve as a reminder that investors potentially need exposure to a more diversified pool of assets if they are looking to achieve income over the long term.
At Capital Group, we believe there is a new reality taking shape in global markets and investors need to reset their expectations. Perhaps the highest profile shift has been the return of inflation and even if this starts to come down this year around the world, consensus suggests levels will remain well above where they have been over recent decades.
Navigating such an environment requires high income solutions and, again, for UK-based investors to cast their net wider. Despite a rise in sterling investment-grade corporate bond yields over the latter part of 2022, they remain well below inflation1, for example; in contrast, global high income bonds are currently yielding around 8.1%2.
Capital Group’s Global High Income Opportunities strategy (GHIO) takes a flexible approach to income generation, investing across countries and different parts of the bond market to find the most attractive opportunities. The strategy has a long track record of high income, with a 7.0% average over the last 10 years3, and we are making it available to UK investors via an open-ended investment company (OEIC) for the first time.4
For reference, that 7.0% compares to an average of 1.8%5 for the UK consumer price index (CPI) over the same period, although current inflation levels are considerably higher.
As the chart shows, GHIO has consistently produced a higher income than a range of UK asset classes (using IA sector medians), outyielding income-focused equities, sterling and strategic sterling bond funds, and property.
GHIO has been a consistent source of high income
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Past results are not a guarantee of future results.
Data from 31 December 2019 to 30 November 2022. Yield for IA (Investment Association) sector median. Yield to worst shown for GHIO based on a representative account for the strategy. Sources: Morningstar, Capital Group
While such a high yield has obvious appeal for income-seeking investors, this consistent level of income can also help smooth periods of volatility and may deliver a compelling long-term total return. Over a long period, income has accounted for more 90% of the GHIO strategy’s overall investment return6.
The two main contributors to this income are high yield and emerging market debt (EMD), which are both traditionally among the higher yielding parts of the bond spectrum. That combination of high yield and EMD (both local and hard currency) gives UK investors access to a much wider opportunity set with far greater economic diversification: compared to a solitary focus on the UK, there are 25 developed corporate high yield markets and more than 80 countries with emerging sovereign and corporate bond markets.
Some investors can be reluctant to pursue the higher income on offer in these areas due to concerns around higher risk, but we continue to believe combining these assets within a diversified portfolio can potentially both boost yield and reduce overall volatility.
High yield and EMD are increasingly well-established markets and the credit quality of both has increased substantially in recent decades. Improving fundamentals have meant greater resilience in recent default cycles, forcing a rethink around the ‘risk’ attached to these markets, particularly compared to the supposedly less volatile developed world.
Meanwhile, an increasingly global investor base and greater breadth by country, industry and issuer has brought greater opportunities for active investors.
Find out more about the just launched Capital Group UK - Global High Income Opportunities fund.
High income with diversification on multiple levels
Past results are not a guarantee of future results.
1. For period from 31 December 2019 to 31 December 2022. Sterling Corporate Bonds represented by yield-to-worst of ICE BofA Sterling Corporate Bond Index. Inflation is based on UK Consumer Price Index (CPI) (all items) annual percentage change. Sources: Refinitiv, Capital Group
2. Data as at 31 December 2022. Yield to maturity (YTM) of Global High Yield blended index (50% Bloomberg US High Yield 2% Issuer Cap Index, 20% JPMorgan EMBI Global, 20% JPMorgan GBI-EM Global Diversified and 10% JPMorgan CEMBI Broad Diversified Index). Source: BlackRock Aladdin
3. Based on a representative account for the strategy.10-year average annual income yield is to 31 December 2022. Dividend yields distributed by share classes will differ dependent on type and how investors choose to pay management fees and expenses. Source: Capital Group
4. The Luxembourg SICAV Capital Group Global High Income Opportunities (LUX) (inception: 7 May 1999) is referenced as a representative account for the strategy. This is intended to illustrate our experience and capability in managing this strategy over the long term. UK investors can now directly access this experience following the launch of Capital Group UK – Global High Income Opportunities on 18 January 2023.
5. Based on UK Consumer Price Index (CPI) (all items). Sources: Refinitiv, Capital Group
6. Based on sources of return for a representative account for the strategy from 31 August 2002 to 31 December 2022. Returns in US$ terms before fees and expenses.
Risk factors you should consider before investing:
- This material is not intended to provide investment advice or be considered a personal recommendation.
- The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
- Past results are not a guide to future results.
- If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
- The Prospectus – together with any locally-required offering documentation – set out risks, which, depending on the fund, may include risks associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.
FOR PROFESSIONAL INVESTORS ONLY
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All data as at 31 December 2022 and attributed to Capital Group, unless otherwise specified.
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Other important information
The information in relation to the index is provided for context and illustration only. The fund is actively managed. It is not managed in reference to a benchmark.
Investors acquire shares of the fund, not the underlying assets.
The fund(s) is (are) offered only by Prospectus, together with the UCITS Key Investor Information Document. These documents, together with the latest Annual and Semi-Annual Reports and any documents relevant to local legislation, contain more complete information about the fund(s), including relevant risks, charges and expenses, and should be read carefully before investing. However, these documents and other information relating to the fund(s) will not be distributed to persons in any country where such distribution would be contrary to law or regulation. They can be accessed online at www.capitalgroup.com/europe, where latest daily prices are also available.
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January 18, 2023
Article: Where can UK investors look for consistent income streams?
Capital Group UK – Global High Income Opportunities
Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.