Investing for Growth in Income



As the Fed warns it will likely raise interest rates, academics, investors and money managers are debating what the impact will be for consumers, lenders and the national economy.

Whether higher interest rates – and possibly higher inflation and a tighter lending landscape – are good news or bad depends on your perspective.

Bahl and Gaynor, a downtown investment firm, oversees more than $14 billion in assets. Stephanie Thomas and Jim Russell, both principals and portfolio managers with the firm, had this to say about changing
market conditions:

 

LEAD MAGAZINE: With interest rates expected to increase, how is your firm preparing clients for that type of economic environment?

STEPHANIE THOMAS: At Bahl and Gaynor, we are prepared for a variety of interest rate scenarios from a client impact perspective. Although higher interest rates have been anticipated for some time, rates have remained on the low side of historical ranges. Bahl and Gaynor believes that while interest rates and inflation have seen their respective lows for this business cycle, the anticipated advance in both metrics is likely to be moderate over the foreseeable future. Certainly, higher interest rates would represent a change in the investment environment we have grown accustomed to over the past few years. 

We have discussed what higher and lower interest rate environments mean with our clients during private meetings and through a variety of timely written client communications. Each of our clients is unique in their needs and requirements. Accordingly, a changing rate environment will have differing degrees of influence on their financial lives. For example, detailed discussions via our financial planning franchise specify the impact of interest rate changes, higher or lower, on a client’s comprehensive wealth plan. 

In terms of investment management, we are fully diversified from an equity standpoint and do not utilize high-yielding equities or bond proxies that can be hurt in a rising rate environment. Additionally, we emphasize income growth investing which historically, has proven to be a powerful offset to a higher interest rate environment. In our fixed income practice, we utilize only short-dated, high-quality fixed income vehicles in order to minimize volatility for our clients. We are prepared and will adjust to meet our clients’ investment objectives regardless of the interest rate environment ahead.

 

LM: What seem to be the top concerns of private clients at this stage of the economic and market recovery? 

JIM RUSSELL: Clients have expressed a variety of concerns regarding meeting their financial goals. A top concern is generating sufficient investment income to maintain or enhance current life style. Bahl and Gaynor’s investment approach provides a growing stream of safe and reliable income flows that out paces inflation while retaining real purchasing power. Annual growth in the income stream via this approach lets time work to the benefit of the client.

Our high net worth private clients have made substantial financial progress over the past several years. Retaining and protecting wealth is a phrase we often hear as a top client concern. Most clients do not have the opportunity to earn back principal should the capital markets turn volatile. Due to the income growth attribute of the higher quality securities we utilize in client relationships, Bahl and Gaynor’s investment style is naturally defensive. We spend considerable time and focus on maintaining client wealth in a variety of market environments. 

Higher taxes are also a key concern of many private clients. Often, we are able to minimize or delay client tax liability via the engagement of Bahl and Gaynor’s financial planning franchise. In many cases, this custom work utilizes a variety of fiduciary vehicles to achieve comprehensive and longer-range family objectives. 

With both the bond and equity markets appreciating strongly over the past 6 years, downside protection and maintenance of principal is a priority. Bahl and Gaynor’s investment style seeks to protect account values by committing capital to companies that blend yield and growth characteristics. Historically, our income growth investment style is less volatile in down market environments while retaining both attractive income streams and upside participation benefits for clients.

LM: Can you give us some insight into what your firm’s strategies are for generating investment
income for clients?

STEPHANIE THOMAS: The generation of safe and reliable investment income flows in the low interest rate environment of the past several years has been a top priority for most investors. At Bahl and Gaynor, we have a long track record of growing client income through the careful selection of dividend growth oriented common equities. Importantly, we seek companies that grow the dividend consistently providing clients with inflation-beating income streams for the future. Over time, not only does the dividend growth of the equities selected provide lifestyle maintenance or enhancement but this investment style has historically provided downside protection to account values in times of market volatility. Additionally, the annual increases in income provided to Bahl and Gaynor clients is achieved with a low degree of trading activity, minimizing client tax liability.

Bahl and Gaynor’s fixed income franchise utilizes floating and fixed rate preferred stocks to generate reliable and market competitive income streams for our clients. Our fixed income instruments are short dated, minimizing the volatility attendant to longer dated bonds and fixed income securities. Bahl and Gaynor’s disciplined internal due diligence process assures that only high-quality securities are utilized in client relationships. 

 

LM: The equity markets have moved higher over the past several years. What is Bahl and Gaynor’s message to clients regarding equities and the outlook for the months and years ahead?

JIM RUSSELL: Discussions with clients center on meeting overall financial goals with a risk profile that is consistent with unique client circumstances and objectives. Equity exposure is frequently part of this dialogue. We are cognizant that many equities now trade at valuation levels that are on the high side of historical averages and dramatic near-term upside may be limited. At Bahl and Gaynor, we are not market timers and believe strongly that over a long time horizon, equities will continue to provide clients a competitive total return. Our investment style allows clients to participate in times of equity market appreciation while limiting losses when stocks trade lower. Thus, we are focused on providing customized client financial solutions in a variety of equity
market scenarios.

Bahl and Gaynor is located at 212 East 3rd Street, Cincinnati, OH 45202. You can reach them at 513.287.6100 or visit their website at www.bahl-gaynor.com.