Equity-income investors should also consider the benefits of pursuing a broader opportunity set by following a global approach. We have found that there is often a much stronger commitment to returning capital to investors through dividends in geographies outside the U.S. In a number of cases, we have found attractive value investments in publicly traded, family-controlled companies, where the family members themselves rely on their business ownership to generate income.
When investing in fixed income today, we prefer carefully assembling a portfolio of shorter-duration, non-investment grade corporate bonds and floating-rate term loans rather than reaching into 10- and 20-year maturities in an effort to find adequate income. In short, we prefer taking selective credit risk over interest rate risk.
One should not compromise sound investing for the sake of income. A focus on value investing and the long-term preservation of capital can help an investor avoid overvalued pockets of the market irrespective of whether the investor’s primary goal is income or capital appreciation. With long-term rates still at historically low levels, we believe many interest rate-sensitive securities appear expensively valued when compared with their historical averages.
While it is certainly possible that long-term rates will stay low, in which case securities that are more interest rate-sensitive may perform well, investors should think through the risk/reward profile of such investments. The Fed has signaled that Quantitative Easing is unlikely to be permanent. However, should QE persist for too long, the risk of inflation mounts – which could itself cause rates to move up dramatically. We advocate that income-oriented investors in particular heed the lessons learned from the “summer stress test”, and prepare their portfolios for the risk that interest rates return to levels more consistent with historical norms.
Robert Hordon is a portfolio manager for the First Eagle Global Income Builder Fund.
Giorgio Caputo is a portfolio manager for the First Eagle Global Income Builder Fund.