BEN Tai, head of retail distribution for Singapore at Allianz Global Investors, sits in a conference room and talks about his efforts to develop steady "passive" income from his investments that will roll in, come rain or shine. While it is usually retirees who crave cash flow over capital gains, the uncertain outlook for global financial markets has heightened the appeal of generating a modest stream of income from one's investments. Even relatively young investors who are still building up savings and assets are seeking investments that deliver their returns in cash.
Tai says he is using investment income he generates to help pay for his mortgage. His goal is to generate up to S$2,000 (RM4,981) per month.
At the moment, his investment of choice is Allianz Global Investor's US High Yield Fund. "Whenever there is a dip in the market and I see value, I will purchase a lot. I bought the first lot in October last year, which was the worst of the sell-off. At that time, the market dropped to very attractive valuation levels."
This strategy is a form of "dollar-cost averaging", where a certain amount of money is invested at regular intervals. By scattering one's investment in a fund or stock over a period of time, more units or shares are purchased when prices are weak and less are purchased when prices are high. "You don't know where the bottom is," Tai says. "We just spread it out so that the initial level of entry is low."
Still, that doesn't take the basic risk of investing out of the equation though. The US High Yield Fund consists of US corporate "high-yield" or junk bonds. "High yield is BB+ and below. They are below investment grade, which is BBB- and above," Tai says. Yet, he isn't too concerned about the risk of things going wrong with the fund owing to the careful analysis and selection of bonds by fund managers at Allianz Global Investors. "We haven't had any defaults."
The way Tai sees it, the outlook for US high-yield bonds is generally improving. Since the global financial crisis, US companies have been working to improve their cash flows and reduce debt loads. "The interest coverage ratio — which is the cash flow generated from the business to cover the interest payment — is close to historical highs," Tai says. That is lowering the risk of owing lower-rated US corporate bonds.
Yet, these bonds are still trading at relatively high yields versus US Treasuries. Bonds held by the US High Yield Fund are trading at average yields of some 300bps above the risk-free rate. In the event that any of these holdings benefit from a credit rating upgrade, their yield spreads could quickly compress. Indeed, while the US lost its triple-A rating last year, US corporates have actually been enjoying more upgrades than downgrades, Tai says.
"We are driven by a bottom up credit analysis, and when our managers went through the statistics of this portfolio, they were very comfortable," Tai says of the US High Yield Fund. If the bonds the fund holds were to benefit from credit upgrades, Tai could end up with a healthy capital gain on top of the income he is receiving. In fact, he reckons that the units he initially bought in the fund had risen some 10% within six months.
However, Tai isn't too interested in realising these gains — he just wants to keep building the stream of investment income. "As long as the bond does not default, as a long-term investor, I'm not overly worried about the day-to-day movement of the net asset value." If anything, he is more concerned about fluctuations in exchange rates that could dilute the yield from the fund, which holds underlying assets denominated in US dollars.
"On cash flow, I have a Singapore dollar hedge because I do not want foreign exchange volatility," Tai says, of his US high-yield bond fund.
"The USD/SGD rate has swung by 7% to 8% and that could wipe out the underlying yield of 8%." With the Singapore dollar hedge in place, Tai says he is confident of the investment serving his needs. "I invest in Singapore dollars, and the interest payments are in Singapore dollars.
This is a pot of money that I want to use to cover the mortgage rate, which is in Singapore dollars."
Now, Tai says he is looking to accumulate more units in the fund. "In April, although the market had recovered, I actually averaged up, so in terms of dollar-cost averaging, I bought in my second lot," Tai says.
"Sometimes you average down, but when the market recovered, I still see value in that particular asset class in the long term, so I got in again."
Tai doesn't discount the possibility that he may one day redeem his investment in the fund to pursue other opportunities. "I could divest if I have a huge capital gain or if I see an opportunity coming up in the equity market." But he says that it is imperative that investors not drift from their intended strategy so that their investments achieve their objectives. "As at now, I am still very comfortable to hold for the long term, unless I pay off my mortgage," he says of his investment in the US High Yield Fund.
This story appeared in The Edge Singapore on July 16, 2012.