Yahoo Finanzen Why Mixed-Asset Income Funds Belong in Your Portfolio
If a typical fund is a fruit salad, a mixed-asset income fund is a bowl of berries: a blend of relatively low-risk stocks and bonds that are designed to channel income to an investor.
This type of fund is becoming more popular as an investment vehicle that is relatively safe, predictable and generous.
Here's how to decipher what's in a mixed-asset income fund and clues as to whether one is right for you.
Mixed-asset income funds start with high-yield bonds, including convertible bonds. Then, managers choose the most stable and protected categories of stocks, such as preferred stock. Fund managers also look for real estate investment trust debt and equity and might include debt or equities in multiple limited partnerships, too.
What mixed-asset funds don't usually include are government bonds, says George Guerin, a Denver-based certified financial planner with his own practice. "The intention here is to take some risk and have it rewarded," he says.
"Our focus is to think about what retirees want -- yes, income, but also less volatility that will hold up well in a sell-off. Risk first, yield second," says Michael Fredericks, head of U.S. Retail Asset Allocation for the BlackRock portfolio strategies group and the lead portfolio manager for its Multi-Asset Income Fund (BIICX) and its Global Multi-Asset Income Fund (BGF). He says he won't let stocks comprise more than half of the holdings in the funds he manages. "We'll never take more risk than that," he says.
Part of the point of mixed-asset income funds is to constantly "refresh the flow" of bonds in the mix, says Philip Blancato, CEO and president of Ladenburg Thalmann Asset Management. To ensure the funds reflect the market, managers go for high-yield bonds with relatively short maturities. That means they can swap out older, lower-performing bonds for newer, higher-performing bonds as they become available. Instead of simply waiting out bond maturities, the fund managers manage "duration risk," which means merging in better-yielding bonds as quickly as possible, Blancato says.
All this mixing and matching translates to a lot of hands-on management, with commensurate fees that can be as high as 80 to 100 basis points, analysts say. These funds are too complicated to be managed automatically. "It's difficult to index because you have to make a choice about how you'll allocate among the categories. You'd have to index within each asset class," says Mark A. Hamilton, chief investment officer of asset allocation at Oppenheimer Funds Inc., in New York.
The proliferation of mixed-asset income funds in the growth environment of the past six years means these fund managers don't have much of a track record in a downturn, says Andrew Thrasher, portfolio manager for the Financial Enhancement Group, an Indianapolis-based wealth management practice.
"The question is, how long has this fund been around? Many have only been around since the recession," he says. "Because they're actively managed, we don't know how those managers can perform in a down market."
Financial planners say that mixed-asset income funds are a good consideration when the bond market is strong, and when you need to diversify an all-equities portfolio.
Guerin likes this kind of fund for investors in their 30s and 40s "because they shouldn't have everything in stocks," he says. "They can afford to take a little more risk in a fund that has a good reaction as interest rates go up."
The holdings of a multi-asset income fund probably will have little overlap with the holdings in a large-capitalization fund, says Dan Ivascyn, Pimco's group chief investment officer and managing director in its Newport Beach, California, office.
"Look at the asset mix. It makes sense to hold stock funds and [exchange-traded funds] along with an income fund. It's an attractive source of diversification even for young individuals," he says.
Mixed-asset income funds are a good choice for investors who are in retirement and shifting to more secure types of investments but still want a bit of growth -- assuming they are OK with the inherent risk of having some stocks in the fund.
Fund managers tend to think that mixed-asset income funds are a good bet for early retirees who need to build growth into their portfolios to stay ahead of inflation, but financial planners tend to skew more toward protecting principal. Either way, a mixed-asset fund might be a good bridge strategy.
Typically these types of funds are going to be of most interest as people approach and enter retirement. "This is not a portfolio for a young person looking to build wealth. This is for someone living off their working income, to entering retirement, and looking to replace income to live off in retirement," Hamilton says.
A mixed-asset income fund might not be for you if you absolutely do not want to lose principal.
"These products are offering 3 percent to 6 percent yield, but that comes with increasing risk," Thrasher says. "They focus on the yield, and if it's offering, say, a 5 percent yield, well, if the stock drops 5 percent in a year, you've wiped out the yield."
"These are not growth assets. Most of these strategies do not have a lot of growth exposure," Fredericks says. "Even though we're managing for risk, this is not a CD."
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