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Article | Investments Quarterly ideas Exchange

The burgeoning role of secure income

A better way to meet your obligations to savers and planet

March 13, 2020

Revisiting our industry obsession of holding zero* return, zero* income, liquid assets with an expected decade plus holding period (*not quite zero, but very close)

What are the problems facing long-term savers and how does a particular asset allocation or investment product help? Without a greater focus on understanding the specific needs of the end saver, Real Assets can be confined to a relatively peripheral role in client portfolios. We observe a 5-10% allocation to Real Assets is fairly typical.

The institutional investment “norm”, particularly within the pension fund industry, is for traditional government and investment grade corporate bonds to play a dominant role in providing liability matching characteristics, being a defensive asset class and delivering a stable income stream. But is that accepted industry norm right? And is now a good moment to revisit, acknowledging that those government and investment corporate bonds currently offer close to zero income and zero return potential?

Secure Income is defined by cashflow and risk characteristics rather than asset class or sector labels

Secure Income is defined by cashflow and risk characteristics rather than asset class or sector labels. Importantly they solve the challenge of low risk and a reasonable level of income generation, with a target of achieving a 3% premium over high quality bonds. Consequently, they are well placed to meet a specific need in institutional investor portfolios.

Given that defined benefit pension funds are maturing, do they still have that long-term investment horizon? In our opinion, the answer is typically yes. The investment horizon for a defined benefit pension fund is typically similar to the tenor of Secure Income assets. There is scope to embrace some illiquidity and exploit the attractive additional returns and income offered, rather than exclusively holding high liquid (government bond) assets on a buy-and-hold basis.

In this article, we outline what Secure Income is, what to look for and how to build Secure Income portfolios, including some real-life examples and case studies.

Norweigan wind farm
Example of Secure Income - Euro renewable energy
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