2024 sees the Aegon Diversified Monthly Income Fund reach it’s 10-year anniversary, and with it an enviable track record of successfully delivering a yield that has averaged more than 5%*, irrespective of the macro and market environment.
There has been no shortage of challenges during this decade: Brexit, a Eurozone debt crisis, a trade war between the US and China, declining Chinese growth, the COVID pandemic, Russia’s war in Ukraine. The most pertinent from an income investing perspective has been the Bond Bull Market of the last 40 years ended by the Great Bond Reset of 2022 and 2023; almost all else has been peripheral. See Fig 1.
Fig 1 – 10 year US Treasury and Gilt yields since 1994
Source: Bloomberg as at end-Jan 2024.
This was helpful for bond investors who benefited from equity like returns (from capital appreciation) for much less risk but increasingly lower rates posed a challenge for income investors. This challenge was starkly evident in the growth, from 2014 onwards, of negative-yielding debt which peaked at over $17trn in 2021. (see fig 2 below).
From the infancy of the fund, therefore, a key piece in solving the income puzzle was alternative (non-traditional) assets whose contractual cashflows offered a high initial income usually backed by a secure contract and with scope for growth, both in income and capital. They include our ‘specialist income’ investments such as listed infrastructure and renewable energy. Their characteristics are part bond, part equity and are often referred to as ‘bond proxies’. Investing through listed investment vehicles (the fund cannot invest directly in real assets) allowed access to the contractual cash flows of such assets as well as valuable visibility on pricing and liquidity. Whilst not a thematic fund, many of these specialist income alternatives naturally enjoy a positive and higher correlation to inflation and investment themes tied to longer term secular shifts (such as energy transition and digitalisation of the economy) which reinforced their attractiveness.
Fig 2 – Negative yielding debt vs Specialist Income allocation
Source: Global Aggregate Negative Yielding Debt (left hand scale) from Bloomberg as at end-Dec 2023. Aegon DMIF’s ‘Specialist Income’ allocation history (right hand scale) as at end-Dec 2023.
As the bond bull market continued to build, and its value for income investors diminished, our ‘specialist income’ allocation grew. From 11% of NAV at fund launch, our exposure rose to a peak
