Research Articles

Destroying Steady Income

The following is an abstract. Please contact me to request a copy of the full article.
For many endowments, foundations, and other investors, a steady income stream is lifeblood for their investment strategy. On one hand, we are fortunate our markets offer a wide variety of securities (e.g., stocks and bonds) providing precisely this. Indeed, there is a long list of companies with extensive histories of paying and increasing dividends many of which are likely to continue (Page 5, Figure 7) and there is an even longer list of highly rated bonds that will pay steady streams of fixed income. On the other hand, it is unfortunate many funds and portfolio managers effectively destroy what would otherwise be steady income streams as their investment strategies treat income as an ancillary concern at best.

We explain this unnecessary income instability and provide examples from some of the largest and most reputable investment funds. We also discuss three primary drivers of this phenomenon: myopic focus on total return, unintended consequences of investment mandates, and advisor over-reliance on statistical models.

Our Solutions section describes simple strategies that make steady income the top priority. Based on the pillars of quality and value, these strategies focus on income and provide a robust foundation for capital preservation and growth. They also facilitate a higher degree of transparency and should thus deliver more peace of mind to retirees and other investors.