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Columbia Threadneedle multi-asset strategy aims for consistent income

The Threadneedle (Lux) Global Multi Asset Income Fund is adding more equities to its portfolio, but aims to deliver consistent regular income with less volatility than an equity-only strategy

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'Risk is our starting point for portfolio construction. Not just the overall risk, but also the risk associated with individual positions and how they interact.' - Maya Bhandari, portfolio manager

ONE of Columbia Threadneedle Investment's well-established global multi-asset funds is turning more constructive on equities, reflecting a fairly bullish view on the global economy amid synchronised growth and reflation around the world.

The Threadneedle (Lux) Global Multi Asset Income Fund has shifted its equities weightage to 55 per cent, up from 50 per cent from 18 months ago, with just about 40 per cent remaining in selective bonds, says its portfolio manager Maya Bhandari.

"We're fairly bullish on the economy," she says, pointing to growth rates that are above trend rates, and as PMIs are generally positive. "Don't overthink it, it's uncontroversial for a reason."

Investors should turn to equities that show off stronger earnings growth, especially as the downside risks on corporate earnings remain benign. For one thing, wage pricing power - which would hurt corporate margins in the absence of higher productivity - still remains weak.

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The fund is cognisant of geopolitical risks, which can have a "meaningful impact", says Ms Bhandari, but also notes that the geopolitical risks are not hampering growth at this point.

"We are in no way complacent about geopolitical risks, but there is nothing on the geopolitical risks that is a flashing red," she says, adding that countries that would hurt the most from a potential trade war, will include the US.

That said, the question about returns is irrelevant if the element of risk is ignored. The Threadneedle (Lux) Global Multi Asset Income Fund aims to deliver consistent regular income through its unique strategy, providing income with less volatility than an equity- only strategy.

Reflecting its careful risk adjustment, the fund invests in equities after taking the companies' leverage position and dividend cover into account. The fund sees dividends as an under-appreciated signal of investment quality and looks for companies that can generate sustainable dividend growth.

The fund is also invested in high-yield corporate debt, but the average duration of these debt instruments stands at about 1.5 years, while the proportion of triple-C rated debt is just a sliver of the total fund portfolio.

"We're now at a point where central banks are tightening, and removing the punch bowl that has been present for the large part of 10 years," says Ms Bhandari.

The fund caps its income distribution at 6 per cent, and aims to provide an annual income of 5 per cent by investing directly in equity and fixed income securities, then supplementing the income using a covered call option.

Each month, the fund sells "out-of-the-money" index call options using the US, Europe (excluding UK), and UK markets on up to half the equity exposure of the fund.

Typically, this is a 1.5 per cent "out-of-the-money" call option and is used to harvest additional income for the fund.

This results in a pay-off that seeks to give investors an additional return in falling markets, though caps the upside on rapidly rising markets.

This combination results in an attractive volatility-controlled offering. Income from the three sources - equities, bonds, and covered call options - have all contributed an average of about 19 basis points, reflecting meaningful contribution.

"Risk is our starting point for portfolio construction. Not just the overall risk, but also the risk associated with individual positions and how they interact," says Ms Bhandari.

The Threadneedle (Lux) Global Multi Asset Income Fund was offered in Singapore in 2015, and has a portfolio size of about US$280 million. On an annualised basis (USD terms), the fund has returned 6.9 per cent (net of front-end load) over two years as at Feb 28, 2018.

The multi-asset team at Columbia Threadneedle Investments manages about US$145 billion in multi- asset investments, comprising 30 per cent of the total firm's assets as at Dec 31, 2017.