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Who says you can’t find yield in today’s market?

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Finding income seems to be on everyone’s mind these days, because the prolonged low-yield environment isn’t providing much of it. The situation is especially critical for the 10,000 Baby Boomers who will reach age 65 every day for the next 15 years,¹ many of whom would like to retire and have enough income to pay their bills.

Low Yields Aren’t Going Anywhere for a While

Unfortunately, income seekers shouldn’t expect interest rates to go up that much in the near future, despite expected rate hikes from the Fed.

Robert Tipp, Prudential Fixed Income’s chief investment strategist states, “The environment the Fed faces is much more fragile than they’ve faced in the past. The economy is carrying a much higher debt load, demographics are well past the crest, and outside U.S. borders there’s even more economic vulnerability than we have here in the U.S.” According to Tipp, inflation is also below target.

“In short,” Tipp elaborates, “this is an environment where long rates are likely to remain low and range bound. That’s what’s needed to foster growth, and allow governments across a range of economies to implement fiscal retrenchment and structural reforms.”

From a U.S. perspective, Michael Collins, a senior investment officer and portfolio manager at Prudential Fixed Income, does note that the Federal Reserve is on the path to raising short-term interest rates and “we think they want to do it this year.” That being said, he believes the Fed will take a measured approach.

“Growth in the U.S. has been underperforming expectations—that will keep the Federal Reserve at bay. We don’t think the Federal funds rate will go up more than 50 to 100 basis points (a basis point is 1/100th of a percent) in the next 6 to 12 months.

Income Demand Is Fueling Product Innovation

It’s no wonder that angst over the search for income is causing the asset management business to spring into action. More than three-quarters of investment product development executives surveyed by Cerulli Associates said that the demand for income is now the biggest driver of product innovation. Income funds across multi-asset and fixed income accounted for 20 of the 93 open-end mutual funds launched year-to-date (through 4/30/15), according to Morningstar.

“Income is driving product development, but we’re also seeing it driving financial advisors’ decisions for portfolio construction,” says Pamela DeBolt, associate director at Cerulli in an article published in Ignites (4/29/15). Half of financial advisors surveyed said demand for income was highly influential in their decision making—only 11% said it had little influence.

Is It Time for a Less Conventional Approach?

Many managers are looking outside traditional sources of income by taking a multi-asset approach, which, according to the Ignites article, “can also help investors manage their risks in income investing, which have risen as investors flock to high-yield and global fixed income amid paltry returns in higher-credit corporate and government bonds.”

A multi-asset approach could include dividend-paying stocks, convertible bonds, REITs, emerging market debt, high yield bonds, MLPs, and preferred stocks, among other investments. An Income Builder portfolio that combines these categories has provided attractive yields.

Income Opportunities

Source: Calculated by Prudential Investments LLC using data presented in Morningstar software products. All rights reserved. Used with permission. The indices used to represent the income builder portfolio are for illustrative purposes only. Average annual index returns do not include the effects of sales charges or operating expenses. Performance above is based on actual index performance. All indices are unmanaged. Short term Corporate Bonds, Emerging Market Bonds, Short Duration High Yield Bonds, and High Yield Bonds represent yield-to-maturity as of 3/31/2015. Convertible Bonds represents yield-to-worst as of 3/31/2015. Dividend Paying Stocks, MLPs, Global REITs, and Preferred Stocks represent dividend yield as of 3/31/2015. An investment cannot be made in an index.

1 The income builder portfolio is represented by an allocation (rebalanced monthly) of indices.
2 60% Stocks /40% Bonds Portfolio is represented by a 60% allocation to the S&P 500 Index (stocks) and 40% allocation to the Barclays U.S. Aggregate Bond Index (bonds), rebalanced monthly.
3 U.S. Government Bonds are represented by the Barclays U.S. Government Bond Index.

Plus, risk-adjusted returns also seem to favor a multi-asset approach. With low interest rates bound to hang around for a while, going the multi-asset route may make a lot of sense for income-seekers.

Mitigating Risk

Source: Calculated by Prudential Investments LLC using data presented in Morningstar software products. All rights reserved. Used with permission. An investment cannot be made in an index.

1 The income builder portfolio is represented by an allocation (rebalanced monthly) of indices. Please see page 7 for the income builder portfolio’s composition. The indices used to represent the income builder portfolio are for illustrative purposes only and are not specific to the Prudential Income Builder Fund (yield, return, or risk). Please see page 5 for fund risks.
2 60% Stocks /40% Bonds Portfolio is represented by a 60% allocation to the S&P 500 Index (stocks) and 40% allocation to the Barclays U.S. Aggregate Bond Index (bonds), rebalanced monthly.

 


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