James R Rieger of S&P Indices looks at how investors can create income within their portfolios, and explains issues and considerations to bear in mind around yield and also inflation.
Date: Feb 2012
For example, he explained, there are high dividend-paying equities, which can be an important part of an investment portfolio. Plus, there are opportunities in fixed income instruments to earn a steady stream of income for a portfolio.
Drivers of yield
But what drives yield is not only the ability of the borrower to repay its debt – it is also the structure of the loan itself, he explained. In Asian markets, the term can be quite short relative to the global bond markets.
Factors affecting yield
Others, he added, include supply and demand, as well as the relative attractiveness of other bonds in the market.
Considerations with income products
The main consideration with yield-enhancing products and strategies is risk, warned Rieger.
In the bond markets, the first risk relates to the potential for default, meaning whether the investor will get repaid. Another risk is liquidity risk, relating to whether an investor can sell the bond for what they think it is worth. Further, interest rate risk refers to where the rate will be in six or 12 months, for example, and how that will impact the bond portfolio.
Impact of inflation
When looking at fixed income, particularly bonds, which make a set repayment over time, Rieger said that inflation is an important driver of a decision about whether to invest.
In particular, said Rieger, there are vehicles in the fixed income market which help investors off-set perceived changes in inflation.