The Yield That Fooled Her

By Parson Tang

It was 8:10 a.m. at the Centurion Lounge in Hong Kong when Linda Cheung, a long-time family office client with a knack for buying after markets rose, waved me over with the kind of calm confidence that only a steady monthly payout can create.

“Parson,” she said as she slid her tea aside, “I don’t know why everyone is nervous. My income fund pays me every month. Seven, sometimes eight percent a year. Never missed. Why should I touch it?”

I smiled. Questions like this are never really questions. They are quiet requests for reassurance, the kind that disappear once real numbers appear.

“We have time before your flight,” I said. “Let’s look under the hood.”

That is how the conversation began: one tablet, a slice of pineapple cake, and a familiar reminder that the most dangerous risks are the ones that feel harmless.

THE COMFORT ILLUSION

Linda tapped her statement. XXllianz Income and Growth, up nicely over the past two years.

“This is better than stocks,” she said. “And safer.”

I turned the screen toward her and drew three simple boxes.

One box for high yield. One box for convertibles. One box for U.S. equities.

“Roughly one-third in each category,” I said. “This is your income fund.”

She frowned. “But they told me it’s a bond strategy.”

“It pays like a bond,” I said, “but behaves like stock beta in a bow tie.”

Then I showed her one number, the kind that changes an investor’s posture.

Recent peak-to-trough drawdown: minus 22 percent.

Silence.

“So how does it pay seven to eight percent every year?” she asked.

“Because the yield is not the income,” I said. “It is the distribution. One reflects reality. The other reflects marketing.”

THE ENGINE BEHIND HER GOOD YEARS

I pulled up a simple chart of high yield spreads.

In early 2020, spreads blew out to nearly one thousand basis points. Today they sit around three hundred.

“Spreads did not just tighten,” I told her. “They collapsed. That gave high yield investors more than twenty percent in price gains as markets normalized. That is a mid-single-digit tailwind each year before coupons.”

Then we looked at the convertibles sleeve.

“Your convertibles rode the tech and AI wave,” I said, showing her how the Nasdaq had climbed since 2020. It looked more like ambition than a chart.

“And the equity sleeve, mostly tech, did even better.”

She leaned forward. “So the manager is really good?”

“Linda,” I said gently, “if I build a simple mix of one-third high yield, one-third convertibles, and one-third U.S. equities, the result almost mirrors your fund.”

Her expression shifted. The quiet realization that skill was not the main driver of her returns.

“The environment did the heavy lifting,” I said. “A perfect one.”

WHEN THE WORLD STOPS BEING PERFECT

Then came the question every thoughtful investor eventually reaches.

“So what now?”

I pulled up the chart every CIO watches. High yield and investment-grade spreads were sitting near the tightest levels of the entire cycle. Not much cushion left.

“Today,” I said, “you’re not being paid for the risk anymore.”

“How bad is that?”

I wrote a simple line on a napkin.

Expected high yield return equals carry minus spread mean reversion minus defaults.

Carry today: about 7 percent.If spreads widen back toward long-term averages: a 2 to 3 percent drag. Defaults in a late cycle: another 2 to 3 percent.

“That leaves you with roughly zero to three percent forward returns,” I said.

She stared at the napkin.

“So my twelve percent last year becomes… two percent?”

“And worse if spreads blow out,” I said. “High yield can drop double digits quickly. You’ve seen that before.”

Her confidence softened. Clarity replaced it.

THE REAL RISK: EMOTIONAL ANCHORS

“But the monthly income,” she whispered. “It feels so stable.”

“That,” I said, “is exactly why it is dangerous.”

I explained how many income funds target a fixed payout. When markets weaken, part of that payout can quietly become a return of the investor’s own capital. The net asset value absorbs the volatility so the monthly check does not have to.

“Your income feels stable because the NAV takes the hit,” I said. “That is how illusions work.”

She nodded. Not defensively, but thoughtfully.

REBUILDING WITHOUT BREAKING HER BELIEFS

“So what should I do?”

I pulled up a framework that has saved more portfolios than any single product.

Engine 1: Core WealthInvestment, grade bonds, Quality global equities, Duration for recession protection

Engine 2: Income Covered call strategies with mid to high single digit yields, Preferred securities around six to seven percent, Short duration investment grade bonds, Structured credit

Engine 3: Opportunistic Satellites, High yield, Convertibles, Multi-asset income funds like hers

“Your fund belongs in Engine 3,” I said. “It is a satellite. Not thirty or forty percent of your net worth. More like five to ten percent. Enough to benefit, never enough to break you.”

She looked at the napkin again. It was not the numbers that convinced her. It was the realization that comfort without understanding can become the most expensive risk of all.

She lifted her tea.

“Parson,” she said, “let’s rebuild this properly.”

And that was the moment every advisor lives for: when a client stops chasing yield and starts choosing wisdom.