What is a Diversified Income Fund?

Potential benefits of a diversified income fund

HOW THE FUND IS MANAGED

A diversified approach to income.

CITI EQUITY Diversified Income Fund is an income solution that has been specifically designed to address the challenges facing income-seeking investors today.

Multi-asset

Income-oriented

Disciplined. Yet Flexible.

Steady monthly cash flow.

Six distinct income-generating asset classes

The Fund invests in a carefully optimized mix of six income-generating asset classes, and disciplined tactical shifts are made in response to market conditions.

The income challenge

Investors face a lot of pressure right now. With today’s volatility, inflation and interest rate concerns, it’s not easy for them to balance risk and reward. This has prompted many income-seeking investors to take on more risk to achieve higher income in both bond and equity markets. Today’s income challenge is complex for both advisors and investors, with many factors to consider:

Assessing all the risks and opportunities takes time and one can quickly become overwhelmed. Historically, income seekers may have been able to invest in bonds to secure enough yield to fulfill their annual income needs; but that’s unlikely to be true today.

Fixed income alone may not be enough in retirement

Today’s muted yields and fixed income returns are unlikely to support the longevity needs of many income-seeking investors, who are now living longer lives.

As you can see, the chart above illustrates the returns and risk of various Canadian fixed income asset classes over the last ten years. For example, the FTSE Canada Universe Bond Index – the over-arching benchmark for Canadian bonds – only returned 1.7% over the decade (before inflation).

If we look past the chart, in addition to muted returns, investors have also taken on duration risk. Currently, the FTSE Canada Universe Bond Index has a duration of 7.39 years and an average yield of 3.92% (Source: Morningstar Direct as of June 30, 2022).

With the index’s duration relatively high and risk rising, an active management approach with more differentiated fixed income asset classes may be required.

In response, many Canadians have looked outside our borders for more yield, returns or lower correlation from their bonds. This may be good from a diversification standpoint, but it leaves many investors trying to determine the best place to invest.

Equities alone may be too volatile

If history teaches anything, investors tend to take on too much equity risk at the wrong time.

Looking at the U.S. S&P 500 Index as a proxy for equities, volatility has increased substantially from 2021. In the first six months of 2022, we have endured more negative days with losses greater than 1% and 2% compared to all of 2021.

Source: Morningstar Direct. Data as of June 30, 2022. All data shown is in U.S. dollars. You cannot invest directly in an index.

In retirement, investors need to find ways to benefit from the longevity advantages of equities while also minimizing annual volatility (which can have a detrimental impact on retirement assets).

If fixed income can’t fund most of an investor’s retirement, and if equities alone might be too volatile, what should they do?

Combine asset classes

One strategy investors can consider is to optimize their exposure to income-generating asset classes.

For example, these income-generating asset classes show low correlation between them, demonstrating a clear opportunity to blend them together in a diversified portfolio.

Source: Morningstar Direct. Data as of June 30, 2022. All returns are in Canadian dollars. Asset classes are represented by the following indexes: Global dividend paying equities – MSCI ACWI High Dividend Yield Index; Canadian dividend paying equities – S&P/TSX Capped Composite Index; Global REITs – FTSE/EPRA Nareit Developed Index; Canadian corporate bonds – FTSE Canada All Corporate Bond Index; U.S. High Yield bonds – Bloomberg U.S. High Yield 2% Issuer Capped Index, Emerging markets debt – JPMorgan EMBI Global Diversified Index.

Looking at returns and volatility, we also see a potential benefit from blending and optimizing the allocations in these asset classes. For investors seeking income it could be winning combination that balances growth to keep up with inflation, and the need for longevity of returns.

Source: Morningstar Direct. Data as of June 30, 2022. All returns are in Canadian dollars. Asset classes are represented by the following indexes: Global dividend paying equities – MSCI ACWI High Dividend Yield Index; Canadian dividend paying equities – S&P/TSX Capped Composite Index; Global REITs – FTSE/EPRA Nareit Developed Index; Canadian bonds – FTSE Canada All Corporate Bond Index; U.S. High Yield bonds – Bloomberg U.S. High Yield 2% Issuer Capped Index, Emerging Markets Debt – JPMorgan EMBI Global Diversified Index.

*Diversified Income Portfolio is represented by: 30% MSCI ACWI High Dividend Yield Index, 10% S&P/TSX Capped Composite Index, 15% FTSE EPRA Nareit Developed Index, 17.5% FTSE Canada All Corporate Bond Index, 17.5% Bloomberg U.S. High Yield 2% Issuer Capped Index, 10% JPMorgan EMBI Global Diversified Index. You cannot invest directly in an index.

Optimize asset classes for enhanced yield potential

Source: Morningstar Direct. Data as of June 30, 2022. All returns are in Canadian dollars. *Diversified Income Portfolio is represented by: 30% MSCI ACWI High Dividend Yield Index, 10% S&P/ TSX Capped Composite Index, 15% FTSE EPRA Nareit Developed Index, 17.5% FTSE Canada All Corporate Bond Index, 17.5% Bloomberg U.S. High Yield 2% Issuer Capped Index, 10% JPMorgan EMBI Global Diversified Index. You cannot invest directly in an index.

Here you can see the current yield on income-generating equity and bond assets. The chart shows that by mixing and optimizing these asset classes, you can generate an attractive level of potential yield.

This can be especially attractive for retirees who need a steady income, coupled with a balanced degree of equity exposure to help fight inflation and longevity risk.

Help smooth annual returns over time

Asset class performance changes every year, so trying to time the market by concentrating on a certain asset class can be a losing proposition.

In this graphic, you can see returns were steadier by optimizing allocations in the Blended (balanced) portfolio. The Blended portfolio benefits from the asset classes that are doing the best, while not being over-allocated to the asset classes that are doing the worst. The result is a more balanced, smoother return pattern over time.

Calendar year asset class returns

Source: Morningstar Direct. Data as of December 31, 2021. Calendar year returns in Canadian dollars.
Asset classes are represented by the following indexes: Global dividend paying equities – MSCI ACWI High Dividend Yield Index; Canadian equities – S&P/TSX Capped Composite Index; Global REITs – FTSE/EPRA Nareit Developed Index; Canadian corporate bonds – FTSE Canada All Corporate Bond Index; U.S. High Yield bonds – Bloomberg U.S. High Yield 2% Issuer Capped Index; Emerging markets debt – JPMorgan EMBI Global Diversified Index.*Blended portfolio is represented by: 30% MSCI ACWI High Dividend Yield Index, 10% S&P/TSX Capped Composite Index, 15% FTSE/EPRA Nareit Developed Index, 17.5% FTSE Canada All Corporate Bond Index, 17.5% Bloomberg U.S. High Yield 2% Issuer Capped Index, 10% JPMorgan EMBI Global Diversified Index. You cannot invest directly in an index.

To achieve their objectives, retirement-focused funds should offer a mix of broad asset classes, capital appreciation, income and volatility mitigation.

Canadian investors can now benefit from a solution that optimizes these income asset classes while also adding a disciplined, incremental approach to tactical asset allocation (which can also help add additional growth potential) – Sun Life CITI EQUITY Diversified Income Fund, sub-advised by CITI EQUITY Investment Management (CITI EQUITY).

Who is behind this asset mix?

Since 1994, CITI EQUITY has created long-term value for investors by allocating capital responsibly. Through all these years, they have leveraged what they consider their greatest strengths and the most important contributors to long-term returns: security selection, in-depth research and global collaboration.

CITI EQUITY Investment Management: Global Research

Through our powerful global investment research platform, CITI EQUITY uncovers what they believe are the best investment opportunities in both fixed income and equity markets using a time-tested three pillar process:

By fully leveraging their world-wide research capabilities we have combined them into a single mandate – CITI EQUITY Diversified Income Fund.

CITI EQUITY Diversified Income Fund
A multi-asset, income-oriented global balanced portfolio.

This disciplined approach allows investors to potentially benefit from market dislocations without taking on the elevated risk associated with significant changes in their core asset allocation. The Fund could be a great fit for retired investors who want a predictable source of income, balanced with capital appreciation potential.

Diversified Strategist Portfolios (DSP) offer scalable, turnkey managed account solutions to help financial advisors grow their practices and efficiently meet their clients’ goals. DSP features five globally diversified, professionally managed investment portfolios designed to provide risk-efficient solutions for a range of investor objectives from income to maximum growth.

Our time-tested strategic asset allocation approach provides a globally diversified base allocation for each Diversified Strategist Portfolio. Tactical asset allocation shifts are executed periodically, in an effort to participate in up markets and minimize the effects of market downturns. Finally, the investment strategies implemented at the asset class level are designed to provide exposures to risk factors that have shown persistent return premiums over time.

Portfolio Solutions for Multiple Investment Objectives

The portfolios invest in cost-efficient FlexShares ETFs and Northern Funds and are available in tax-sensitive and standard portfolio implementation options.

Let's say you have $10,000 in cash and you want to buy 100 shares of a stock that is currently priced at $100 per share. Normally, you would only be able to purchase 100 shares with your $10,000.
However, with margin trading, you could potentially borrow additional funds from your broker to buy more shares. Let's say your broker allows you to use a 2:1 leverage ratio, meaning you can borrow up to twice the amount of your cash balance. In this case, you could borrow an additional $10,000 from your broker, giving you a total buying power of $20,000.
You decide to use the full amount of your buying power to purchase 200 shares of the stock, at $100 per share, for a total cost of $20,000.
If the stock goes up to $110 per share, your 200 shares would be worth $22,000, resulting in a profit of $2,000.

Diversifying investments can help reduce the risk involved in margin trading. Instead of putting all our buying power into a single stock, we spread your investments across multiple securities or asset classes.
By diversifying, we can potentially offset losses in one position with gains in another, reducing the overall risk of our portfolio. This can help to mitigate the impact of volatility in the market and reduce the likelihood of a margin call.
For example, instead of investing all of our buying power in a single stock, we could use margin trading to purchase a mix of stocks, bonds, and ETFs. This can help to spread risk across different asset classes and potentially provide a more stable return over time.
It's important to note that diversification alone does not guarantee a profit or protect against losses, and it's still important to carefully manage our margin requirements and risks. However, diversification can be a useful tool in managing risk when using margin trading as part of our investment strategy.

HOW MUCH LEVERAGE DO WE USE?

We use a position of 10:1 leverage in margin trading and this means that we are able to leverage up to 10 times the amount of our own funds to purchase an investment. This means that for every dollar of our own funds, we can leverage an additional $10 from our broker.

For example, if an investor has $1,000 in their margin account, we would be able to use 10:1 leverage to potentially purchase up to $10,000 worth of investments. This could allow the investor to potentially amplify their returns, as gains on a $10,000 investment would be 10 times greater than gains on a $1,000 Investment.

It's important for us to carefully consider your risk tolerance and margin requirements before using high levels of leverage in margin trading.

HOW LEVERAGE TRADING APPLIES TO MULTIPLE ASSET CLASSES

Leverage can be used across a variety of financial markets stocks, indices, forex, treasuries, CFDs, and ETPs. Also, you can use leverage in investing outside your margin account. Leverage exchange-traded funds (ETPs) use borrowed funds to deliver returns of 2x, 3x or even 5x vs their benchmark indices. There are many advantages of using ETPs in comparison to other investment vehicles that use leverage.

Benefits of using ETPs vs other financial instruments.