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Beating inflation in a period of low interest rates

As the global economy slows, investors are seeking alternatives to generate steady returns without taking too much risk

It pays to know where to invest your money, especially in the time of falling interest rates. PHOTO: ISTOCK
It pays to know where to invest your money, especially in the time of falling interest rates. PHOTO: ISTOCK

Central banks are expected to continue cutting benchmark rates to kick start their countries’ economies, further putting downward pressure on interest rates and bond yields in coming months. Keeping your money in the bank is therefore not ideal since low interest rates will erode the value of your savings over time.

Investing in financial markets has, however, become a lot trickier. On one hand, yields from top-rated government and corporate bonds have fallen to near-record lows, making them less effective as a hedge against inflation. On the other hand, equity markets have become riskier due to relatively high valuations and a slowing global economy.

To achieve a reasonable return without taking on too much risk, you may want to consider a wider range of assets for income and capital growth.

More to yields than bonds

You can, for example, invest in preferred securities, which generally offer yields that are higher than investment grade bonds yields, as seen from the chart above.

Preferred securities have characteristics of both stocks and bonds; they typically pay dividends instead of coupons and without a definite maturity date. They also rank below bonds when it comes to repayments. Hence, while the investment risks are theoretically higher, the default rate for preferred securities has been lower historically compared to global investment grade corporate bondsii.

Warren Buffett’s Berkshire Hathaway is one of the best-known investors in preferred securitiesiii.

One fund that can provide you with exposure to this asset class is the Manulife Preferred Securities Income Fundiv. This fund invests mainly in preferred securities issued by large, highly regulated companies such as banks and utilities whose cash flows tend to be stable and predictable.

Another alternative to bonds is real estate investment trusts (REITs), which collect rental income from the properties they own and distribute them as dividends to investors.

The Manulife Asia Pacific REIT Fundv aims to enable investors to attain a predictable income stream by investing in REITs with high quality properties and management in Singapore and in other Asian REIT markets outside of Japan.

Manulife Investment Management also manages income funds that invest primarily in Asian investment grade bonds, as well as a multi-asset income fund that is designed to deliver a consistent and competitive yield with potential for capital appreciation through investments in a pool of different assets.

In uncertain financial markets marked by major geo-political risks such as the ongoing US-China trade war and Britain’s possible exit from the European Union without an exit deal, it pays to invest with a trusted fund manager.

Visit asia.manulifeam.com/incomesolutions for more information on Manulife Investment Management’s suite of income funds.

i US high-yield bonds is represented by ICE BofAML US High Yield Index; Global high-yield corporate bonds by Bloomberg Barclays Global High Yield Total Return Index; Preferred securities by ICE BofAML US All Capital Securities Index; Asia-Pacific REITs by S&P Pan Asia Ex-Japan, AU NZ TR REIT TR Index; Asian investment grade corporate bonds by JPMorgan Asian Investment Grade Corporate Index; US corporate bonds by ICE BofAML US Corporate Index; Global REITs by FTSE EPRA/NAREIT Global REIT TR Index; Global equities by MSCI World Index; Global investment grade corporate bonds by Bloomberg Barclays Global Aggregate Corporate Total Return Index; US treasuries by ICE BofAML US Treasury & Agency Index.

ii The 10-year default rate (between Dec 2009 and Dec 2018) is 0.09% for global investment grade corporate bonds and 0.05% for preferred securities. Source: Bloomberg and Moody’s Investor Services. Preferred securities default rate is calculated for the $25 par preferred securities market.

iii Source: Berkshire Hathaway Inc. financial reports, 1995-2016

iv The full name of the fund is Manulife Global Fund – Preferred Securities Income Fund

v The full name of the fund is Manulife Global Fund – Asia Pacific REIT Fund

Important information: The source for all opinions and information shown in this article is Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration Number: 200709952G) (“Manulife”), unless otherwise stated. Manulife Global Fund is an investment company registered in the Grand Duchy of Luxembourg. The information provided herein does not constitute financial advice, an offer or recommendation with respect to the funds referred herein. Investments in the funds are not deposits in, guaranteed or insured by Manulife or Manulife Global Fund and involve risks. Distributions are not guaranteed. The value of units in the funds and any income accruing to them may fall or rise. Investors should read the Singapore prospectus, and seek advice from a financial adviser before deciding whether to purchase units in the funds. A copy of the Singapore prospectus and the product highlights sheet can be obtained from Manulife or its distributors. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the funds are suitable for him. Opinions, forecasts and estimates on the economy, financial markets or economic trends of the markets mentioned are not necessary indicative of the future or likely performance of the funds. The funds may use financial derivative instruments for efficient portfolio management and/or hedging. This advertisement has not been reviewed by the Monetary Authority of Singapore.