Importance of income in portfolios to grow in 2023

Oksana Patron

19 January 2023

The role of income in portfolios is expected to grow even further in 2023 as global markets turn away from elevated capital growth and historically high asset prices, according to Talaria Asset Management.

After a period of strong capital gains, the current decade would be more likely to see a far lower contribution of return, given the established relationships between interest rates, leading economic indicators and corporate earnings which signalled falling profitability in the second half of 2023, according Talaria’s co-chief investment officer, Hugh Selby-Smith.

The manager said that although income always mattered it did not contribute significantly to returns every decade, with the S&P 500 indicating investors had no return from capital appreciation in the 1910s, 1930s and the 2000s.

“This leads us to believe that the 2020s is very likely to be a decade where capital gains will be a far lower contribution of return, highlighting the importance of income,” he said.

At the same time, 2022 stressed the importance of risk management and investors were avoiding assets that magnified market moves and preferred assets with shorter rather than longer payback periods.

“On a regional basis, markets outside the US offer better prospective returns given lower starting valuations,” Selby-Smith said.

He also warned that this year would continue to be a “dangerous time” to add risk to the portfolios.

“Amid high inflation, it pays to own assets that allow you to recoup your investment sooner rather than later. This is because with inflation increasing, a dollar now is worth more than a dollar in the future.

“Monetary authorities around the world will not be loosening financial conditions any time soon as they try to fight spiralling inflation, meaning investors must position their portfolios accordingly.

“Our experience over more than 17 years has reinforced our view that there are other ways for Australians to generate greater certainty of investment income returns beyond the well-worn approach of harvesting fully franked dividends from ASX stalwart stocks.”