Technology companies may be among the last places where most investors would think to look for income. The conventional wisdom holds that tech investing means growth stocks, not income, and those formerly high-flying tech stocks have been losing altitude. In part that's true: Since April 2021, small and mid-cap stocks of technology companies have experienced the greatest sell-off of any category of stocks over that time, as interest rates have risen and businesses have cut spending on tech.
But if you only focus on the vertiginous plunge in tech stock prices, you may overlook the reality that many tech companies are still viable businesses with real products, earnings potential, and customers and they offer investment opportunities besides stocks.
Adam Kramer manages Fidelity® Multi-Asset Income Fund (FMSDX). He invests in a wide variety of income-oriented assets and seeks returns that are comparable to what stocks have historically delivered, but with much less volatility than stocks. Kramer sees opportunities in the convertible bonds that many tech companies have issued in recent years as a way of raising capital to fund their growth. Convertible bonds are securities that pay interest like other bonds, but which also may convert to shares of stock at a predetermined time in the future and at a predetermined price.
Technology firms and other fast-growing companies have long issued convertibles to help fund their growth and Kramer has seen opportunities to buy convertible bonds at prices that are significantly less than their face, or "par" value.
Why convertible bonds are appealing to income-seeking investors
Convertibles not only pay interest, they also reduce some of the potential drawbacks of both stocks and longer-duration bonds. Convertible bonds generally are less sensitive than high-yield or other bonds to the risks that changes in interest rates may pose. Convertible prices can fall if interest rates rise and stock prices decline, but they are less sensitive to such changes than both stocks and traditional corporate bonds.
Kramer anticipates that interest rates are likely to stop rising in the months ahead and he sees opportunities in what are known as "busted" convertible bonds, which are convertibles that trade at prices below their face value. "Many of these busted convertible bonds are trading at between 60 and 75 cents on the dollar," says Kramer. "More than 50% of the convertible bonds in the market are trading more like bonds and may be less volatile than stocks, which have historically struggled when the economy slows as it may in the months ahead," he says.
But before individual investors consider convertibles, they should remember that the convertible bond market is both small and specialized, and conditions in it can change quickly. This is because unlike other asset markets, the makeup of the convertible market is constantly changing as existing bonds get converted to stock and leave the market while new bonds with different features take their place.
How and why to seek unexpected income opportunities
The reason for seeking opportunity in busted convertibles and other less-familiar income investments is because these investments may deliver higher potential yields than more familiar ones such as stocks or investment-grade corporate bonds and they may also be available to purchase at discount prices. "Market conditions constantly change and the investments that deliver the highest returns today may not be the ones that do so next month or next year," says Kramer. "For a long time it was stocks, stocks, stocks. This year, though, I believe the best-performing asset class is likely to be something other than stocks."
Opportunities in bank preferred stocks
Unlike managers of strategies that can only invest in a few types of assets, even if those may not present the most attractive opportunities, Kramer looks for high-quality assets whose prices have been temporarily pushed down by investors overreacting to uncertainty about the interest rates, economic growth, or other factors unrelated to the ability of the assets to deliver yield to the investor who holds them. "We're investing in different asset classes that are not in traditional benchmarks," he says.
Besides tech company convertibles, investment-grade fixed-to-floating rate preferred stocks issued by big banks are another example of how this approach can find opportunities in unexpected places. Like tech stocks, bank stocks have been in the news recently for reasons that give many investors concern. Kramer believes that larger banks do not face the challenges or pose the same risks for investors that smaller ones do, and that their investment-grade debt presents a more attractive opportunity than do their dividend-paying stocks.
Like tech companies, banks also issue securities other than stocks and Kramer believes that their fixed-to-floating rate preferred stocks may offer some of the most attractive opportunities among income investments in the months ahead and an alternative to the common stocks of these same companies. "Fixed-to-floating rate preferred stocks of large banks have offered yields 3 to 4 times higher than the dividends paid on the banks’ common stock," he says. "As regulation increases, interest rates move lower, and the economy slows, bank earnings and dividends may be lower in the future. Meanwhile, investment-grade fixed-to-floating preferreds have been trading below their face value while also offering up to 4 times more income than those banks' dividends offer. They also offer additional upside to par when their interest rates begin to float in 1 to 3 years.
Despite these advantages, they have sold off along with bank stocks as investors worried first about how higher interest rates would affect them and then about how a recession could affect the financial health of the issuers. "Last year the bank preferred market sold off a lot more than the bank stocks, so the market had already priced in a lot of the risk into preferreds," says Kramer.
Opportunities in gold stocks
Another source of unexpected income opportunities as the economic and interest-rate landscape evolves in coming months may be the stocks of companies that mine gold.
Gold has long been popular with investors who are concerned about the power of inflation to reduce the value of cash and other investments, but owning it also comes with risks. Gold miners' earnings have historically grown when demand has risen, as it often has in times when economic growth has been weak and real yields decline along with interest rates. Gold miners typically distribute a significant portion of those earnings to shareholders in the form of dividends.
According to study by McKinsey & Company, the gold-mining industry is also likely to experience a wave of mergers and acquisitions in coming years, which could further increase the appeal of mining company shares for investors.
Like other stocks, dividend-paying value stocks of gold-mining companies have been affected by higher interest rates, but Kramer believes that both rates and a potential economic slowdown have already been priced in and gold miners now offer sustainable dividend payments of 4% to 5% as well as attractive stock prices.
Not all that glitters is gold
Of course, just because an investment is unfamiliar doesn't mean you want to buy it and professional management and research can help you manage the risks that come from venturing into less-common income investments. Investors interested in multi-asset income strategies should research professionally managed mutual funds or separately managed accounts. You can run screens using the Mutual Fund Evaluator on Fidelity.com. Below are the results of some illustrative mutual fund screens (these are not recommendations of Adam Kramer or Fidelity).
Multi-asset class income funds
- Fidelity® Multi-Asset Income Fund (
- BlackRock Multi-Asset Income Portfolio (
- Invesco Multi-Asset Income Fund (
Separately managed accounts
- BlackRock Diversified Income Portfolio
The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.