Investment means employing capital to generate income and profit and fund managers have a duty to capture that income despite a tough environment, argues Jens Vanbrabant, a lead portfolio manager at European Capital Management, speaking at the Investment Management Symposium hosted by WealthBriefing and the financial services software firm Advent.

And despite the low-yield environment, there is income to be found – but it may require clients taking on higher levels of risk than was previously necessary, he said. 

With US ten-year government bonds yielding around 2.6-2.7 per cent, and with uncertainty over inflation, it is certainly not an easy task to capture reliable income streams. “Whether or not you think government bonds are overpriced depends on the macroeconomic picture,” said Vanbrabant. Dividend yields on the S&P 500 are higher than government bond rates, and with the index trading at a price/earnings ratio of 15, government bonds look expensive, he said.

The traditional asset classes a manager considers investing clients’ assets in are equities, credit and cash; cash yields no income. Yields are, however, increasing in the equity markets, but there remain large macro-economic risks, said Crispin Lace, a partner at Mercer. Meanwhile, the bond markets are vulnerable to inflation and have already had a long rally.

“This picture means clients are looking outside of normal investments and taking on a level of risk they wouldn’t normally take on,” said Lace.

One sector offering better income prospects (than government bonds) is corporate credit, and with company balance sheets strong after a period of deleveraging this sector could offer value, said Vanbrabant. He therefore recommended reviewing clients’ government bond holdings, with the intention of substituting these assets for investment grade or high-yield credit.

Emerging market debt was also touted as a source of income. The growth arguments for emerging markets are well-known, but the massive infrastructure projects going on in Asia need funding and the debt side is often overlooked in favour of equity investment, said Lace. Also, the governments of the key Asian economies tend to run large surpluses and have cash to pay back their debts – unlike debt-laden Western governments.

“I would rather lend my money there… and the income stream is better,” said Lace.

One thing is for sure: there’s no risk-free income available, said Martin Endgal of Advent, who added that recent conversations with a number of investment managers across the EMEA region revealed they are struggling to find value without taking on “uncomfortable” levels of risk.

In his opinion, the low yields on EM debt – rather than being a product of risk levels there coming down, a frequently-stated argument – are a cause for concern about hot money flows driven by the extraordinarily loose monetary policies of Western governments.

Regulation is another force for uncertainty, but will ultimately make the banking sector better capitalised and less-leveraged, which is a good thing, said Simon Thorp, head of fixed income at Liontrust Asset Management.

It also means that with financial institutions scaling back lending there are opportunities for wealth managers to make clients money by providing financing to parts of the market where it has dried up, added Mercer's Lace.