4 Income Funds That Play Defense

Bonds traditionally serve as a ballast to more volatile equities in multi-asset portfolios, but they struggled to perform their duty in 2022 when equity markets experienced their deepest losses since the 2008 financial crisis. Seven interest-rate hikes that year contributed to the worst performance for bonds in decades, with the Bloomberg U.S. Aggregate Bond Index losing a whopping 13%. More recently, as investors priced in the expected end of interest-rate hikes, the month of November 2023 brought an eye-popping rally: Bond losses turned into a moderate gain of 1.6% for the year through November, while equity returns roughly doubled, with the S&P 500 returning 20.8%. Navigating these markets hasn’t been easy, but here are four multi-asset income funds that have handled the environment well and outperformed more than 70% of their respective peer groups since the beginning of 2022. All hold Morningstar Medalist Ratings of Bronze, Silver, or Gold.

American Funds Income Fund of America AMECX invests in dividend-yielding stocks and bonds. The strategy’s equity exposure ranges from 60% to 80% based on where the team finds attractive yields, and a stock must yield at least 2.5% to be considered for the portfolio. The fixed-income sleeve leans into lower-quality bonds. The team shifted modestly out of equities and into cash and high-yield bonds in late 2021 and early 2022. Management also kept a low duration (interest-rate sensitivity) as the Federal Reserve hiked rates. Both decisions helped the fund’s performance profile in 2022, though they were less helpful in 2023′s equity rally. From the beginning of 2022 through November 2023, the strategy’s 2.2% loss was shallower than its moderately aggressive allocation Morningstar Category index and median peer by 1.6 percentage points on average.

Vanguard Global Wellesley Income VGYAX is run similarly to Gold-rated Vanguard Wellesley Income VWIAX but has a global purview and more flexibility when it comes to active management. Managers approach income in a measured way, avoiding the riskiest fare across asset classes. The bond team positioned its sleeve more defensively leading into 2022 in preparation for rising interest rates. The team boosted credit quality and moved to shorter-duration notes. This, along with the value tilt in the equity sleeve, mitigated the fund’s losses in 2022, but value-oriented stocks have faced stiff headwinds in 2023. The fund’s 1.9% decline from the beginning of 2022 through November 2023 was less than that of the global allocation category index and median peer by 2.4 percentage points on average.

BlackRock Multi-Asset Income BAICX in the moderately conservative allocation category and BlackRock Managed Income BLADX in the conservative allocation category seek attractive risk-adjusted yields (as measured by yield versus price volatility). These funds invest across various income-generating asset classes to build diversified and risk-conscious portfolios. Their risk-aware approaches allow investors to earn a stable income while limiting volatility. In fact, over the decade ended in November 2023, both strategies maintained a volatility (as measured by standard deviation) lower than that of their custom benchmarks that blend the MSCI World Index and the Aggregate Index. Both strategies also have good downside protection and held up well within their respective categories during 2022, buoyed by their lower-than-average duration. While the Managed Income fund benefited from the 2023 equity rally, the Multi-Asset Income fund’s less-than-average equity exposure acted as a headwind. From the beginning of 2022 through November 2023, BlackRock Multi-Asset Income lost 3.2%, while BlackRock Managed Income lost 2.1%. These losses were roughly 2.3 percentage points shallower than their respective Morningstar indexes and 1.6 percentage points shallower than their respective peer medians on average.

This article first appeared in the December 2023 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.