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Surprising opportunities for income seekers

Key takeaways

  • Convertible bonds issued by tech companies, floating-rate preferred bank stocks, and dividend-paying stocks of gold miners are among the income investments that may offer opportunities in the second quarter of 2023.
  • Investing in a wide variety of assets may help investors meet their needs for income despite the potential for an economic slowdown and the end of higher interest rates.
  • In exchange for higher income, some assets may experience more volatility than traditional income investments.
  • Professional investment managers have the research resources and investment expertise necessary to help identify opportunities and manage the risks associated with higher-yielding security types.

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.

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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 funds

  • Fidelity® Multi-Asset Income Fund ()

Non-Fidelity funds

  • 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.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

The views expressed are as of the date indicated and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments. The third-party contributors are not employed by Fidelity but are compensated for their services.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.

High-yield/non-investment-grade bonds involve greater price volatility and risk of default than investment-grade bonds.

Floating-rate loans generally are subject to restrictions on resale. They sometimes trade infrequently in the secondary market, so may be more difficult to value, buy, or sell. A floating-rate loan might not be fully collateralized, which may cause it to decline significantly in value.

Preferred securities are subject to interest rate risk. (As interest rates rise, preferred securities prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Preferred securities also have credit and default risks for both issuers and counterparties, liquidity risk, and, if callable, call risk. Dividend or interest payments on preferred securities may be variable, be suspended or deferred by the issuer at any time, and missed or deferred payments may not be paid at a future date. If payments are suspended or deferred by the issuer, the deferred income may still be taxable. See your tax advisor for more details. Most preferred securities have call features that allow the issuer to redeem the securities at its discretion on specified dates, as well as upon the occurrence of certain events. Other early redemption provisions may exist, which could affect yield. Certain preferred securities are convertible into common stock of the issuer; therefore, their market prices can be sensitive to changes in the value of the issuer's common stock. Some preferred securities are perpetual, meaning they have no stated maturity date. In the case of preferred securities with a stated maturity date, the issuer may, under certain circumstances, extend this date at its discretion. Extension of maturity date will delay final repayment on the securities. Before investing, please read the prospectus, which may be located on the SEC's EDGAR system, to understand the terms, conditions, and specific features of the security.

The Fidelity Mutual Fund Evaluator is a research tool 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. 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.

Value stocks can perform differently from other types of stocks, and can continue to be undervalued by the market for long periods of time.

The gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.

Fluctuations in the price of gold often dramatically affect the profitability of companies in the gold sector.

Changes in the political or economic climate, especially in gold producing countries such as South Africa and the former Soviet Union, may have a direct impact on the price of gold worldwide.

The gold industry is extremely volatile, and investing directly in physical gold may not be appropriate for most investors.

Bullion and coin investments in FBS accounts are not covered by either the SIPC or insurance "in excess of SIPC" coverage of FBS or NFS.

The technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic condition.

Indexes are unmanaged. It is not possible to invest directly in an index.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.

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