Diversified income portfolios becoming more relevant as investors chase steady returns

Diversified income portfolios are not considered traditional income-oriented investments, but are coming into their own as a more mainstream option for investors wanting steady monthly income returns while interest rates remain stuck in the basement.

Investors will need to navigate low interest rates for years, according to Matthew Lemke, fund manager (income funds) with boutique investment house Prime Value Asset Management. “The incidence of coronavirus in Australia has certainly dissipated in recent weeks but record low interest rates are casting a shadow over investor portfolios as investors can no longer achieve a decent interest rate on their savings.

“When RBA governor Philip Lowe says interest rates could be locked at record lows for years, investors are almost forced to find other ways to produce income.

“They need to consider alternatives but be mindful about how much risk they wish to take on board.”

Diversified income portfolios are attracting more interest by investing in unlisted securities across diverse income producing instruments, Mr Lemke said. “It’s possible to achieve returns of four and five per cent by spreading risk across income securities such as traditional debt securities, mortgage securities, corporate bonds and other income-producing assets.

“Risk is managed by targeting quality securities and prioritising fixed rates of return over floating rates of return.

“Using this approach adds steady income to a portfolio without the volatility we see in listed securities.”

Investors including retail investors, family offices, high net worth investors, charities and trusts were all showing interest in diversified income, according to Mr Lemke. “There is value in diversity, and as we work through COVID-19 diversifying into quality assets is the name of the game.

“Investors are strongly motivated to consider unlisted allocations for income returns, as they saw what happened early in 2020 when even the safer listed markets were smashed.”

The Prime Value Diversified High Income Fund, managed by Mr Lemke, launched in August 2019 and targets a 4% p.a. return net of fees above the RBA cash rate. The lower risk Prime Value Enhanced Income Fund (previously the Prime Value Cash Plus Fund) has delivered a 2.87% p.a. return net of fees since inception in 2014.

Boutique manager Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing approximately $2 billion across equities, income securities, direct property and alternative assets investments.