Retiring babyboomer investors face a storm on two fronts – slumped yield from traditional investments and their own longevity, according to an investment specialist.
Demand for income has driven down yields of traditional fixed income assets, such as government bonds, Zurich Investments specialist James Holt said.
“Emerging market bonds, which traded at yields of 7 to 8 per cent above US bonds in 2001, now trade for just 2 per cent above the US 10-year bond rate as, once again, the hunger for income has driven investors to buy them for the sake of yield at any price,” Holt said.
Also, demand for high income products has led to the engineering of financial products to artificially generate yield. Collateralised debt obligations, for example.
Reacting to the hunger for yield, the Zurich Equity Income Fund has implemented a modified buy write strategy.
The fund was launched in October last year and has $90 million invested.
Previously only utilised by wealthy investors, a “buy write” strategy entails selling call options or the “right” to buy blue chip shares over a client’s portfolio.
It is effectively renting shares to another investor with the option to buy shares if they reach a certain price.
Investors trade long-term capital gains in exchange for upfront income. The fund targets 10 per cent income per annum.
Holt is the author of white paper The Silver Tsunami and the Hunt for Yield.
