Opinions differ as to what constitutes Durable Income. For example, is investing in traditional fixed income such as in government treasury or in corporate bonds the same thing as investing in Durable Income?
The answer is a resolute no.
Durable Income investing is very different from fixed income investing for it has different asset characteristics as well as sources of risk and return drivers. Such differences can be a source of both resilient long term income and skills based excess returns, as well as a valuable investment diversification tool. Intuitively, Durable Income cash flow streams are relatively stable and predictable – say for example in the case of a long term infrastructure investing concession, often resulting from either a captive customer base, or from long-term contracts, or regulated pricing schedules, and limited competition or licensing. Stable, income producing, occupied, core real estate is yet another example.
In these two instances the stable cash flows generated by mature infrastructure assets, such as electricity transmission cables, roads, and oil pipelines are analogous to the rental income streams in core real estate. These stable cash flows provide resilient long term income – in other words Durable Income.
Durable Income, unlike traditional fixed income, is designed to be more resilient to economic downturns, to changes in credit and market risk, as well as to evolving macroeconomic conditions. Also, Durable Income returns are derived through multiple return drivers, and not just from interest rate bets alone.
Durable Income’s long term characteristics are critical to investors seeking to match long term assets against long term liabilities (e.g., pension plan and insurance company liabilities or individual retirement needs). In some cases their long term inflation linked cash flow characteristics are attractive duration hedges for long term liabilities.
Durable Income aims to produce relatively higher dividend yields, in conjunction with moderate capital appreciation potential. It is expected to exhibit a low correlation with the overall market, thereby offering portfolio diversification benefits, too.
This unique combination of attributes as an investment approach makes it particularly attractive for a wide range of investors, but especially for those seeking to add long dated, income-generating investments to their portfolio.
For more on this topic, read our full briefing.
This blog is courtesy of RC Securities, an FSI Ambassador Sponsor and does not reflect the views of FSI.