As more investors enter retirement, the need to generate current income becomes an important investment objective – but it comes with many challenges. For example, retirees may find that the income they can generate from traditional sources falls short of covering the ever-increasing cost of living in retirement. Relying solely on traditional fixed income, or dividend-paying equities, or a combination of both, may not generate sufficient current income. Consequently, investors may feel forced to take on more investment risk than is appropriate as they hope for improved yields. This can put their retirement nest egg at risk and jeopardize their financial security.
 

A Few of the Many Challenges to Income-Oriented Investing

  • After decades of low and declining interest rates, investors are now facing the potential for persistently elevated inflation, higher interest rates, and an ever-increasing cost of living, all of which put pressure on retirees.
  • Traditional sources of investment income may be less reliable than in prior decades, and bonds alone may no longer provide the same combination of yield and capital stability they once did.
  • The next phase of the current economic and market cycle could lead to a potential credit contraction, as liquidity is extracted from markets, capital becomes scarce, and investor risk tolerance declines.
  • A recent collapse in credit spreads (the difference in yields across bonds based on credit quality) means that investors may not be adequately compensated for taking on additional credit risk as they search for higher yields.

Listed above are just a few of the challenges and risks that investors face when building income-oriented portfolios. Taken together, they challenge the assumption that any single asset class, such as core bonds, would be capable of consistently meeting investors’ income needs while also preserving their capital.


The 3EDGE Response to Income Generation 

In response to increased demand from advisors and clients, we launched our 3EDGE Income Plus Strategy in January of 2020. This Strategy seeks superior income-generating yields over traditional bond portfolios while reducing risk across market cycles. 

3EDGE Income Plus Chart
Data Source: Bloomberg, 3EDGE


The 3EDGE Multi-Asset Income Generation Approach 

The 3EDGE Income Plus Strategy is guided by the same investment philosophy, research methodology, and investment process that govern all of our 3EDGE strategies. The strategy invests across a range of asset classes, employing broad, full-time asset diversification and a dynamic allocation approach as we make tactical changes to the portfolio based on our proprietary 3EDGE Global Capital Markets model.

Informed by our model research and guided by our investment committee, we seek to combine a wider variety of income-oriented investment vehicles into a coherent portfolio that aims to enhance current income and preserve capital. By broadening the available investment opportunity set beyond the more traditional, siloed core bond approach, we can access a wider range of income sources while potentially improving risk-adjusted returns and portfolio resilience across market cycles.


Globally Diversified Income Generation

Instead of relying on one source of yield, the strategy combines multiple income-producing investments. By drawing income from different sources, we seek to reduce reliance on any single market or asset class. With less dependence on traditional bonds or stocks alone, we seek to leverage how different income sources respond to evolving market environments, changes in interest rates, economic growth, inflation, and risk sentiment.

3EDGE Income Plus is built on this globally diversified, multi-asset framework utilizing strategically defined minimum and maximum allocation ranges across the asset class categories that comprise the portfolio. Investments can span equities, hard assets with covered calls, closed-end funds, treasury inflation-protected securities (TIPS), and more. 

Guided by our Global Capital Markets Model, these allocations will then dynamically shift and adapt in response to evolving market and economic conditions in an effort to balance yield, return, and risk.

Traditional Equity Income Sources Traditional Fixed Income SourcesNon-Traditional Income Sources

0% – 40%
e.g. Dividend-paying stocks,
Equities with covered calls, etc.

55% – 95%
e.g. U.S. Treasuries,
Collateralized Loan Obligations, etc.

5% – 25%
e.g. Gold with covered calls,
Closed-End Funds, etc.

Conclusion

In a world defined by macro uncertainty, increased volatility and shifting market regimes, relying on a limited source of investment income may not deliver sufficient current income while also exposing investors to unnecessary risk. 3EDGE Income Plus seeks to provide a multi-asset, income-focused investment approach that offers the potential to diversify sources of income, manage risk more effectively, and adapt as economic and market conditions change.

 

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DISCLOSURES

The opinions expressed in this paper are those of 3EDGE Asset Management and are subject to change without notice. It is intended to provide information only and does not constitute an offer to buy or sell any security. This presentation is not intended to provide personal investment advice and does not take into account the unique investment objectives and financial situation of the attendee. Investors should only seek investment advice from their individual financial advisor. Information provided in this presentation includes information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments including common stocks, fixed income, commodities, ETNs and ETFs involve the risk of loss that investors should be prepared to bear. Past performance is not indicative of future results.

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