The dramatic improvement in bond prices over the last two years is allowing multi-asset managers to focus their equity allocations on growth-focused stocks rather than bond proxies, according to Vincent McEntegart, co-manager of the Aegon Diversified Monthly Income fund.
While the bounce back in bond income has made owning bonds for their income-generating qualities more desirable, McEntegart said the knock-on effect has also been to free up capital from income-generating ‘bond proxy’ equities into growth-focused companies.
“Being less reliant on equities for income offers a chance to reshape that component of the portfolio by geography, industry and theme,” he said.
“Low average yield from the US equity market is no longer the issue it was,” he added. “Instead, its growth potential is something that can be more readily tapped.”
For example, McEntegart said it would have been difficult to own companies such as Microsoft, which is developing AI and has a 49% stake in ChatGPT, and Broadcom, a global leader in semiconductors and infrastructure software, when income was scare since they yield less than 1% and 2% respectively.
“Growth themes in other markets are not off limits either,” he added. “Some 7.4% of our portfolio [25% of equities] is now invested in eight businesses benefitting from the technology and AI theme which has been an important growth engine while other parts of the market have faltered.”
Meanwhile McEntegart argued the reset in bond prices has also enabled multi-asset managers to look to bonds for other qualities.
“Adding to bond allocations, particularly investment grade, allows for lower volatility,” he said. “When uncertainty remains significant and asset correlations high, it is surely better to tilt towards the contractual income of bonds and their pull-to-par nature which aids total return.
“Markets wax and wane with the economic cycle, as we have seen in the ten years since the fund’s inception,” he added. “Navigating that in real time is key.”