Nikko reveals new strategy for income investors

George Carter

As record-low interest rates continue to narrow the opportunity for low-risk investors, Nikko AM has unveiled its new Income Fund, providing investors with a 3% defined income rate on their investment.

The income fund has been a fixture of Nikko AM for a number of years, but the current strategy came into being around July 2020.

Managing director George Carter told Good Returns: “We have long been thinking about the need that this fund has been aiming to meet. Covid and the historically low interest rates have brought that into sharp focus.”

Carter sees this fund as part of a financial strategy that extends beyond covid: “The need for yield is not a post-covid issue and there’s no silver bullet. There’s only a number of ways to generate yield, you can take risk, duration, credit risk, equity, property. These tools that we have to generate yield haven’t been changed by covid. What’s different are investors’ risk appetites.”

The fund generates income through a diversified portfolio comprising up to 30% shares alongside a base of fixed income assets.

Carter explains the fund is looking to “hold a reasonable amount of duration in those bonds, as those bonds get shorter maturity we will sell and reinvest in bonds back at a longer maturity. Which keeps our yield higher than it otherwise could be.”

The bonds portion of the fund is supplemented by 24% held in shares. Carter says that “there we are targeting companies like, Contact, Chorus, Vector, Mercury. Companies that are paying good dividends. They are there to give us options.”

Nikko AM have separated themselves from other low-risk funds by having a declared distribution rate announced at the start of the year, so investors will know when, and how much will be paid out of the fund despite shifts in the market.

But Carter is quick to mention that the best tool at a fund's disposal is the skills of their investment managers, “we have an extremely skilful set of portfolio managers on our team, we have great practitioners working to deliver an outcome that we see a need for in the market”.

Carter muses that we could see many more of these kinds of funds as investors look for security in a post-covid world, without surrendering their yield to historically-low interest rates.

“If you can get the yield that you are looking for from just putting your money in a bank that’s a relatively easy strategy. Investing in a range of corporate bonds, government bonds, managing yields and duration bonds and reinvesting back into longer duration bonds, whilst also monitoring the equity market, that’s getting a lot more complicated.

“So if you can go to a professional fund manager and have investment professionals looking at the portfolio, that allows investors to get on with what they want to be doing, which probably isn’t managing their assets on a day to day basis.”