Times have been tough for investors seeking regular income payments. Nearly all bond sectors have made losses for investors this year. Meanwhile, some of the companies which could once be relied upon for good dividend payments from their shares – such as Tesco and Glencore – have cut or scrapped them entirely.
But specialist fund managers are still scouring the market for sources of income. Some of them are coming up with contrarian ideas for investments, places where few other fund managers have invested and where income payouts are still high.
From the Cyprus government to energy companies, fund managers will be able to bump up the overall level of income paid out from their fund with these investments.
For savers, investing via a specialist fund means having money diversified across a range of other assets too, which limits the risk.
Cyprus government bonds
The government of Cyprus announced it was selling seven-year bonds this summer, a first for the country that was hard hit by the financial crisis and had to receive a bailout. The deal was well-received by investors as the country's fortunes are changing. Indeed, Fitch and Standard & Poor’s upgraded its credit rating last month – a sign of how much things have changed for Cyprus.
“We saw it as an opportunity to invest into an improving country,” says Stephane Fertat, analyst on the T Rowe Price Global Unconstrained Bond fund, who added these bonds into his fund.
Energy and resources
Bonds issued by energy and resource companies became a much riskier place to be invested this summer, after the price of many commodities fell to a 11-year low. This has put serious pressure on companies in the sector, and for some, question marks will be raised over their ability to pay back bond holders.
Although both energy and resources as a whole are now “dramatically” more risky, says Fraser Lundie from Hermes Investment Management. He says there are a few companies which have stronger business models. One big trend which has come about since commodity prices began falling is that companies are cutting back the amount of money put into research, development and exploration projects. This may help them prioritise bond holders.
“I expect to see divergent performance within these sectors, as stressed companies begin to engage in much more bond holder-friendly corporate activity at the expense of near-term equity performance,” he says.
As merger and acquisition activity has picked up in recent months, stronger players in the resource and energy field could also be potential targets for purchase by a larger business.
“We are currently seeing opportunities in Range Resources, which benefits from being a low-cost producer, has significant proven reserves, and is increasingly looking like an M&A candidate,” Lundie says.
European and US high yield debt
The anticipated first interest rate rise by the US Federal Reserve could mark the beginning of a period of rate hikes, as monetary policy is returned to more normal levels. Some investors worry that this will lead to higher borrowing costs for businesses quite quickly, and those classed as “high yield” or lower credit quality may find it harder to pay back their bonds.
But while some people say this scenario will mean the end of the recent spell of good fortune investors have had from the high yield sector, others are more positive. J.P. Morgan's Nick Gartside, argues that this doom-mongering is premature.
“That [scenario] generally happens after the Federal Reserve has finished raising rates, and has removed the proverbial punchbowl,” he says.
Problems in the sector tend to arise 12-18 months after the Fed has finished its cycle of rate rises, when the impact of the new monetary policy begins to bed in, he says. Given that the first interest rate rise keeps getting pushed further out – and may still be many months away – high yield is still attractive. It is also paying out good levels of income compared to other corporate and government bonds.
“Our view on high yield debt is that it’s still a buying opportunity with plenty of upside,” Gartside adds.