J.P. Morgan Asset Management

Press Release

Investors rethink income investing as new challenges rise, J.P. Morgan Asset Management says

·  Search for income rapidly becoming more complex; investors need to rethink traditional approaches

·  Juggling income and growth highlights investors’ need for balanced exposure to equities

14 May 2013: J.P. Morgan Asset Management analysis on UK and European investors’ continued hunt for income highlights new complexities challenging investors to rethink conventional investment approaches. Unprecedentedly low yields on traditional income instruments continue to force investors towards riskier assets. J.P. Morgan Asset Management markets and economics data illustrates the complexities of assembling a diversified income portfolio that provides growth while managing risk.

Difficult to find ‘income’ in traditional fixed income

European core government bond yields have fallen to historic lows as a result of ultra-loose monetary policy, the flight to safety during the eurozone debt crisis and weak domestic growth. As the chart below from J.P. Morgan Asset Management Guide to the Markets Europe illustrates, real interest rates are now negative across much of the developed world.

“Yields on traditional income investments such as cash are no longer keeping pace with inflation. An investor putting €100.000 in a one-year bank deposit in 2007 would have generated income of €4.580. Today that same investment would only generate a tenth of that amount,” said Dan Morris, Global Markets Strategist, J.P. Morgan Asset Management.

New danger in ‘safety’ with bond risk rising

As the challenging income environment pushes investors to move into riskier assets, many have progressed along credit spectrum into lower quality, higher-yielding investments to achieve their objectives. Many bonds are now trading at significant premium to par value.

Investors chasing yield may find themselves taking on more credit and interest rate risk than they may have normally been comfortable with, but these risks can be addressed through appropriate portfolio diversification. Interest rates will inevitably start to rise as central banks seek exit strategies for ultra-loose monetary policies, adding significant tail risk to what investors once thought to be a ‘safe’ asset class. Just a 1% rise in local interest rates would cause the estimated price return of pan-European sovereign debt to fall by around 7%, illustrating the sensitivity. Non-traditional types of fixed income may actually provide some protection against rising interest rates as the higher coupons available offset falling prices.

“Clearly investors should be looking for flexibility with the prospect of rising yields. Importantly, they have to broaden their horizons when it comes to sourcing income across a more diversified global landscape of asset classes,” said Olivia Mayell, client portfolio manager, JPM Multi-Asset Income Fund.

A global opportunity set for juggling income and growth

Today’s challenging income landscape justifies investors to seek a multi-asset, multi-geography approach. Shifting to non-traditional investments that add yield and diversification means investors have to look outside Europe at asset classes including global high yield bonds, developed and emerging market equities, emerging market debt, mortgages, convertible bonds, global REITs, and preferred equities, among others.

“As shown on the chart below, investors willing to take a broader approach can overcome the impact of overactive central banks. Whereas cash, Bunds and European corporate debt fell behind average eurozone CPI inflation in 2012, income from the MSCI Europe Index, global REITs, emerging markets debt and high yield debt provided a cushion,” said Mayell. “Taking an actively managed, flexible asset allocation approach to bring together the best risk-adjusted sources of income globally would be a more dynamic way to counter today’s income challenged environment,” she added.

Bond-like equities as an income alternative

As monetary policy tightening approaches, investors seeking attractive risk-adjusted total returns may consider that lower-risk equities offer a diversified income stream and the potential for capital appreciation.

“As the chart below illustrates, companies are cash rich and MSCI dividends are growing globally, making equities a good source of income,” said Dan Morris, Global Market Strategist, J.P. Morgan Asset Management. “Valuations on the highest yielding dividend stocks are beginning to look expensive as strong inflows have gone to equity income funds, so investors should seek strategies that prioritize quality companies with sustainable and growing dividends. Finding quality stocks with good earnings growth forecasts and low volatility should help to balance and diversify the risk of equities investing,”

- Ends –

For further information please contact:

Charlotte Powell, J.P. Morgan Asset Management

Telephone: 020 7742 2112

Email:

Lansons Communications

Victoria Murray

Telephone: 0207 566 9708

Email:

Notes to Editors

About J.P. Morgan Asset Management

J.P. Morgan Asset Management is part of JPMorgan Chase & Co. and is a global asset management leader providing world-class investment solutions to clients. With US$1.5 trillion in assets under management (the Asset Management client funds of JPMorgan Chase & Co. as at 31 March 2013) and offices in 41 locations around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.

J.P. Morgan Asset Management is a trading name of J.P. Morgan Asset Management Marketing Limited, which has issued this material in the United Kingdom and which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 288553. Registered office: 25 Bank Street, Canary Wharf, London E14 5JP.

Stock market linked investments carry a number of inherent risks. These risks will increase where fluctuations in exchange rates impact on the value of any underlying investments or where the investment is exposed to smaller companies or emerging markets. Investments in fixed income securities that are not rated as investment grade represent a greater risk to an investor’s capital.