Adam Tejpaul, head of investments for J.P. Morgan Private Bank in Asia, talks to Hubbis about trends and opportunities in income-enhancing products, and looks at the best ways for investors to deploy such strategies in their portfolio.

Date: Feb 24, 2012

Tags: Income, Yield, Equities, Dividends, Credit, Asset allocation, Fixed income, Portfolio construction

There are plenty of opportunities today to generate yield both in the fixed income and credit markets.

Dividend yields on equities remain attractive and both investment-grade and high-yield spreads offer good value.

For those with access to managers with access to more institutional-oriented products, mezzanine debt and leveraged loans offer good value as well.

What are the best ways to access these opportunities?

There are a variety of access points ranging from the plain vanilla equity to more complex derivative-based products. Something can be found for any level or risk or any level of sophistication.

Diversification remains key in the market today. Whether you will be investing in fixed income or credit markets, investors need to diversify across numerous securities.

For those without the ability to manage these exposures day-to-day, employing an active manager for a portion of one’s assets makes sense. A typical high-yield portfolio may contain 40 to 60 different issuers, which are best overseen by a professional manager.

Why would anyone want to employ yield-enhancing products and strategies?

In an environment where investment sentiment remains challenged and investors are overweight cash, there is a natural desire to generate yield while one searches for better investment opportunities.

To what extent have volatile and uncertain markets sharpened the spotlight on the need to find ways to enhance portfolios?

Volatility has a negative impact on sentiment but often provides excellent investment opportunities.

For those with the ability to invest in derivative-based strategies, a move up in volatility often provides better entry levels and more attractive risk-reward payoffs. Investors need to be nimble to take advantage of market moves in volatile markets.

What are some of the current opportunities in Asia in terms of income-enhancing products?

Opportunities exist across all the asset classes. Fixed income across the credit spectrum, high-dividend stocks, equity-linked notes and dual currency contracts are some of the main ones.

Where specifically should be investors looking in terms of dividend opportunities?

They should be focused on companies not only paying dividends but those with a strong outlook who are likely to be increasing dividend payouts in the future.

How can investors ensure appropriate suitability?

The need to employ complex products is not necessary to seek income. Even conservative investors can build an income-oriented portfolio now.

What are some of the risks or other issues to consider?

In credit markets, there is always the risk of default which is somewhat mitigated through diversification.

That being said, if there is an outright deterioration in credit quality it will affect all investors.  Such a change in credit quality usually happens with corresponding weak economic fundamentals.

Investors in this space need to monitor their positions and the broader environment actively.

What is the impact of inflation on income-enhancing products and strategies?

Despite the massive increase in central bank balance sheets, inflation remains well contained. 

Should the outlook change, investors would need to reduce the interest rate-sensitive exposures in their portfolio.