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By Jeremy Glaser | 09-18-2014 11:00 AM

Yield Investors: What You're Looking For Isn't There

In today's environment, income investors must settle for relative attractiveness, such as in dividend-paying equities, in a space that is not attractive overall, says State Street Global Advisors' Chris Goolgasian.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Chris Goolgasian. He is the head of portfolio management of the investment solutions group at State Street Global Advisors.

Chris, thanks for joining me.

Chris Goolgasian: Thanks, Jeremy. I appreciate it.

Glaser: Let's start with looking for income. You obviously manage a fund that's out there looking for income, that's allocating to different ways of finding it. Investors have been searching high and low for it. Are there any places left, any stones that haven't been overturned?

Goolgasian: That's a good question. I think the old line "comparison is the death of happiness" is a great way to describe the landscape that investors find themselves in today. I feel like investors think that there's something they don't know about, and they are just searching to find out about it. It's like they think there is a big secret, but there isn't. Everything is unattractive in the yield space. And it's a relative world where you have to find the ones that are slightly more attractive in a space that, in general, is not attractive.

I think if investors can embrace that idea, they can avoid some of what I've termed "the optimistic unknown," which is searching and being optimistic for higher-yielding product that's really unknown to them and how it's constructed and how it works. That's a recipe for disaster.

Glaser: So, what does look more attractive on a relative basis?

Goolgasian: For our income-slanted portfolios, we've been significantly overweight in dividend-paying equities, which on a number of metrics are significantly more attractive than the entire fixed-income landscape. Now, within fixed income, we've preferred credit over Treasuries. The spreads have certainly tightened and are no longer as attractive as they have been; but still, there's a little something there.

We've also preferred something that most of the marketplace really does not like, and that's the long end of the curve. And the long end of the curve is a great diversifier to holding dividend-paying equities. So, it helps to reduce volatility. In a year like this, long end also has an added benefit having had a really good run. But the marketplace is generally short duration. People think rates are going to rise and they are going to rise quickly, and people have had no appetite for the long end of the curve. Everyone wants to move shorter on this big worry about interest-rate increases, and certainly that is going to happen someday. We're not so sure it's going to happen imminently. But in the meantime, you get much more carry on the long end, and from a diversification standpoint, it is a terrific diversifier to holding this extra equity because the long bond is a great risk reducer to that equity position.

Glaser: On the other hand, what doesn't look very attractive right now?

Goolgasian: So, we've been underweight in high-yield, and our perspective is, on a risk basis, we certainly prefer dividend-paying equity over high yield. Equities are reasonably valued, and we think high-yield is overvalued. And generally, high yield tends to act like equities, especially in riskier markets. And on the equity side, you have the potential for innovation and growth and a yield that is also, at times, pretty healthy, too.

Now, you have high yield with a spread that is extremely low, absolute yields that are very low--very little upside--and of course, being a fixed-income instrument, no ability to innovate, grow and all of that. So, within our tactical positions, we've been underweight in high yield and overweight in the dividend payers.

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