About 85% of advisor portfolios now include multi-asset class (MAC) funds, according to a recent kasina survey, with an average allocation of nearly 15%. MAC funds vary by purpose, including some designed for investment income. "We think the new generation of income-focused funds will eventually rank among the top three choices by MAC users," says Lawrence Petrone, director of research at kasina.
As the name suggests, MAC funds' holdings span a wider variety of asset classes than traditional equity or fixed income funds. "We have specialists following the underlying sectors," says Michael Schoenhaut, portfolio manager for the JPMorgan Income Builder Fund. "I use their information to put together the fund's overall asset allocation, trying to find the precise weighting to produce the best income yield per unit of risk, plus adequate diversification." Among the asset classes included in this particular income-oriented MAC fund are global equities, global REITs, convertibles, high yield bonds, and emerging markets debt.
Schoenhaut says that MAC income funds can help advisors by providing in-depth research into many different types of investments, and the appropriate mix, freeing up more time for advisors to spend with their clients. "These funds also can provide access to income choices that might not be easily available to advisors," he says, "such as non-agency mortgages. More investment opportunities may help to provide more consistent income."
Petrone cites three reasons he believes multi-asset income funds will gain popularity among advisors. First, he mentions the income needs of baby boomer near-retirees and retirees. "Traditional bond ladders and multi-asset conservatively managed portfolios do not provide the yield to meet the needs of most retail clients," he says, "particularly with the yield curve at such low levels." To meet those needs, Petrone continues, advisors will seek new products that include diverse sources of income.
Second, kasina survey data shows that many advisors allocate a substantial portion of portfolio assets to multi-asset funds with flexible or dynamic strategies. "Why wouldn't advisors also delegate some of their income allocation to asset managers," Petrone asks, "particularly when many of their clients' books require income?"
Finally, Petrone predicts that more asset managers will offer advisors targeted income products for their retiree portfolios. Says Petrone: "These funds would not only provide advisors with an idea about the fund's income targets, which can help them better manage the overall client income objectives, but such funds also would make the discussion with retail clients much easier."
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
This story is part of a 30-day series on Social Security and retirement income strategies.