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Durable Income Monitoring

Many investors are drawn to fixed income because it provides steady income, and has the ability to diversify portfolio risk. Fixed income investors contend with the challenges of very low expected returns, a paucity of skilled managers who have the potential to outperform the benchmark in what is a fairly efficient asset market as well as take on interest rate, credit spread and unexpected inflation risk.

Fixed Income vs. Durable Income – Difference?

Durable Income approach can mitigate the shortcomings of traditional fixed income investing. In other words it seeks to provide what fixed income often does not provide; (i) potentially higher absolute returns; (ii) both capital appreciation and income return; (iii) potential for higher risk adjusted return; (iv) unlocking an illiquidity premium when warranted; (iv) long term resilience; (v) and niche opportunities in credit investing.

Durable Income, unlike many fixed income investing approaches allows investors to tap multiple return sources beyond just interest rates:

  • Returns from interest earned on money lent.
  • Returns from taking on credit risk.
  • Returns from locking in money for long periods by way of an illiquidity premium.

Returns that skilled managers generate from active decisions; from market timing by increasing or decreasing exposures, through sector over/under weight, through security selection as well as employing other ways to outperform the market.

Properly designed, Durable Income strategies offer ways to invest with lower volatility, lower correlation to traditional fixed income sources, and potentially more predictable income streams. These have particular value in a low returns regime, where unexpected interest rate and inflation shocks risk reduce the value of traditional fixed income portfolios.

Also there are periods of time when certain sectors of the fixed income/ credit/ real assets market offer better relative valuations providing opportunities for outsized return; actively managed Durable Income strategies, as alluded to earlier, have the potential to create skills based returns.

Key Points

Traditional fixed income returns are very low and outperforming efficient markets is difficult. It is increasingly hard to ignore emerging fixed income investing risks from unexpected inflation, interest rate and credit spread widening.

Investing passively in traditional fixed income exposes investors to low expected returns, has little scope for capital appreciation, comes with significant interest rate risk, forsakes opportunities in unlocking an illiquidity premium, as well as excludes niches in credit investing.

With traditional fixed income, reduced risk appetite is expressed through a preference for holding shorter duration assets, pursuit of interest rate neutral strategies and an expectation of a higher illiquidity premium.

Durable Income is a complement to traditional fixed income investing in an inevitable (albeit difficult to time) rising rate environment.

Durable Income, unlike traditional fixed income, has its foundation in multiple resilient drivers of return; interest rates, credit spreads, illiquidity and alternative risk premiums amongst others. The more the sources/drivers of return, the lesser the dependence on a particular market factor, and the more resilient the investing thesis.

Durable Income, unlike traditional fixed income is intended to be more resilient to economic downturns, to changes in credit and market risk and to macroeconomic conditions.

Durable Income seeks to preserve the attractive features of traditional fixed income - stable, consistent, predictable returns - but potentially mitigates its risks as well as provides opportunities for capital gains.

Durable Income characteristics include current income, low volatility and low correlation to other investments, and can provide portfolio diversification benefits.

Durable Income investing, when implemented through active management, is a potential source of both market based (beta) and skills based returns (alpha).


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