Mr Argent also comments on why defensives might be interesting considerations. "From a sector perspective, given where valuations are, we prefer defensive sectors.
"We also like sectors that have been out of favour over recent years – namely financials and energy stocks. These sectors should outperform in a rate rising environment and if the recovery in commodity prices continue."
He adds: "Given that global monetary policy is still accommodating, and the global economic background remains favourable, emerging market bonds and equities may offer an attractive income, but this would mean accepting more risk.”
Diversification
Necessity is the mother of all invention, and that explains why the industry has had to become more innovative to produce an attractive income stream with a suitable amount of risk, according to Will McIntosh-Whyte, assistant fund manager at Rathbone Strategic Income Portfolio.
He says: “If bond yields were higher, we would feel more comfortable using long-term fixed income assets to lay a solid foundation for our portfolio’s cash flow. As it is, that is out of the question in today’s world.
"A portfolio with a balanced mix of assets has typically given an inherent protection against equity market falls. We believe quantitative easing and extremely low interest rates have distorted this historic precedent somewhat.
"To adapt to this, our strategy has been to buy fewer gilts, treasuries and corporate bonds than we would under normal circumstances. And those that we do buy are typically of much shorter duration, so they are less sensitive to changes in interest rates."
Mr McIntosh-Whyte adds interest rate risk is not restricted solely to bonds as some equities are much more sensitive to changes in rates than others as are infrastructure funds.
He states: “Worries about ‘bond proxies’ – low growth consumer staples, utilities and telecoms companies – reached their zenith a couple of years ago. But the problem hasn’t gone away. We are largely avoiding these companies and focusing on growth companies.
"These are companies in markets that are structurally expanding, or those with unique products that are simply outpacing the competition.”
He adds that rather than being restricted to the UK, Rathbone is able to own shares around the world, in many different sectors, which helps with diversification.
However, he said they all tend to have a few things in common: strong margins, high returns on capital employed, pricing power, low leverage and top-line growth that is less reliant on economic expansion. These companies tend to have lower or no dividends because they are reinvesting that cash to grow their business.
