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2019: A Strong Year for Income Assets, Less So for Some Income Funds

A volatile end to 2018 resulted in an overly conservative positioning going into 2019.

Most asset classes, especially income-generating ones, enjoyed a strong 2019 after a volatile 2018. Popular dividend-payers, such as Microsoft (MSFT) and Procter & Gamble (PG), and large banks such as JPMorgan Chase (JPM) significantly outperformed. And on the bond side, the higher-yielding bond categories, such as corporate debt, high-yield, and emerging-markets debt, returned an average of 13%.

With a yield of almost 5%, BlackRock Multi-Asset Income (BIICX), with a Morningstar Analyst Rating of Silver, is one of the most income-oriented strategies among its allocation--30% to 50% equity Morningstar Category peers. This strategy leverages BlackRock’s strong fixed-income and risk-management capabilities to take a more tactical approach to asset allocation across a broad universe that includes global high-yield, bank loans, covered-call strategies, and preferred stocks. In 2018, it performed well, beating 75% of its category peers with a decline of 3.6%. In 2019, the fund's bond sleeve was well positioned--by year-end it was overweight high yield, bank loans, and emerging-markets debt, with allocations at 19%, 14%, and 6%, respectively. But the fund’s 2019 return of 13.9% lagged 72% of category peers, as the fund’s strong performing fixed-income sleeve could not overcome its below-average allocation in equities for most of the year and its underweight in the highest-returning areas of the U.S. market, such as technology and communication services.

Bronze-rated JPMorgan Income Builder (JNBSX) also takes a more tactical approach across a broad menu of income-generating assets and is currently yielding about 4%. Over the course of 2018, the managers trimmed its 45% allocation in equities to about 34% by the end of October, ahead of the subsequent steep market declines. That year, the fund declined 4.2%, landing above the allocation--30% to 50% Morningstar Category average decline of 5.0%. But the managers maintained a lower equity allocation through 2019 while equity markets rallied. It also kept an average BB credit-quality bond portfolio in 2019, which was higher than its average B in 2018. This more-conservative portfolio was not well positioned in 2019 when riskier assets outperformed, and as a result, the fund's performance of 15.0% landed just below the average peer that year.

Vanguard Wellesley Income (VWINX) is the only multi-asset income fund to earn a Gold rating. Both the bond and equity managers employ a disciplined, quality-focused process and stick close to their 35% equity, 65% bond allocations, adding value via strong security selection. The fund’s current yield of 2.9% is not high, but this fund delivers on a total return basis. Its consistently defensive portfolio held up well in 2018, when its decline of 2.5% was top-decile performance within the allocation--30% to 50% equity Morningstar Category. But it doesn’t lag in up markets either, returning 16.5% in 2019, outperforming 76% of its category peers, even with a value tilt in its equity sleeve and a higher credit-quality focus in its bond sleeve, relative to category averages. Vanguard Wellesley Income has maintained a Gold rating since Morningstar introduced its Analyst Ratings in November 2011. Over that time through December 2019, the fund’s 7.6% annualized returns handily beat the category average of 5.2% and the category benchmark’s 6.1%. The fund’s Sharpe ratio of 1.54 was also significantly higher than the category average of 0.93 and the category benchmark’s 1.16.

Patricia Oey has a position in the following securities mentioned above: MSFT. Find out about Morningstar’s editorial policies.