Artemis Income, CF Miton UK Multi Cap Income and M&G Optimal Income are among the income funds that FE’s panel of leading financial advisers think could be appropriate for investors with cautious, balanced and aggressive risk profiles.
The search for income has been a persistent trend in markets over recent years and many expect funds that focus on this strategy will remain popular with investors over the years ahead.
However, investors have a choice of hundreds of funds that have income generation as an aim. Therefore, FE Trustnet has looked across the three AFI portfolios put together by a panel of advisers to see which are rated highly for all investors.
UK equity income
Most investors, whether they need the income or not, will have at least one UK equity income fund in their portfolio, owing to the attraction of the compounding power of dividends over time. It is no surprise therefore that there are a number of IA UK Equity Income funds that have made it into all three AFI portfolios.
The largest fund in the sector – Artemis Income – is one. This £7.3bn portfolio is headed up by the FE Alpha Manager duo of Adrian Frost and Adrian Gosden with Nick Shenton and focuses on companies' free cash flow generation to find income opportunities.
Square Mile said: “The fund is managed by an able team of managers who have extensive experience running UK income funds. The team's focus on free cash flow, while not unique, does guide the managers towards more robust situations and it helps highlight the potential risks in companies’ business models.”
It has returned 57.28 per cent over the eight years of the past market cycle, outperforming its average peer and the FTSE All Share index by around 10 percentage points. It’s also outperformed both in eight of the last 10 years.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
The fund has more than 60 per cent of its assets in mega and large-cap companies, with its top holdings including Imperial Tobacco Group, GlaxoSmithKline and HSBC.
One fund that is deemed suitable for aggressive, balanced or cautious investors and searches further down the cap spectrum is FE Alpha Manager Daniel Hanbury's R&M UK Equity Income fund. The fund has less than half of its portfolio in mega and large-caps, with 26 per cent in mid-caps.
The FE Research team said: “Hanbury has experience running funds that buy small, mid-sized and large companies, and shifting between the sectors as conditions change, which should stand him in good stead.”
Since Hanbury took over the portfolio in August 2013, the fund has posted a total return of 18.81 per cent, which is just below the 19.89 per cent average gain in the sector but ahead of the 13.90 per cent rise in the FTSE All Share.
A fund with a higher weighting to smaller companies is JOHCM UK Equity Income, which has almost one-third of its assets in the small-cap space. Headed up by James Lowen and Clive Beagles, the fund hold five FE Crowns for its superior performance in terms of stock-picking, consistency and risk control.
The FE Research team said: “The managers invest in more small- and medium-sized companies than other equity income funds and as a result the fund tends to experience greater fluctuations in value. Historically when markets have gone up the fund has tended to rise higher, while it has posted slightly smaller losses on average when markets have contracted.”
Two other top-rated funds are included in all three AFI portfolios and have a high allocation to small-caps: CF Miton UK Multi Cap Income and Marlborough Multi Cap Income. Both hold five FE Crowns and have been some of the best performers in the IA UK Equity Income sector over recent years.
Gervais Williams and Martin Turner’s CF Miton UK Multi Cap Income is up 93.55 per cent over three years while Siddarth Chand Lall's Marlborough Multi Cap Income has gained 91.53 per cent; the average fund in the sector rose 56.33 per cent while the FTSE All Share was up just 44.61 per cent over this time.
International equity income
Investors will often look to diversify their holdings by geographic exposure but only one income fund with a global mandate has made it onto all three AFI portfolios – Newton Global Income.
The fund has been managed by James Harries since November 2005 and resides in the IA Global Equity Income sector. Over Harries’ time on the fund, it has posted a total return of 129.72 per cent and has been the highest returning fund in the peer group over this time frame.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Given Newton’s generally cautious view on the world, the fund is relatively defensively positioned – which has resulted in third-quartile returns over one and three years. It also maintains that stocks’ income pay-outs must exceed that of the FTSE World index by 25 per cent to be included in the portfolio.
The FE Research team said: “James Harries warns investors that the portfolio may resemble many other income-seeking funds, but it is not just a dividend-buying strategy. The level of income it pays out has been stable over the last two years and the next distribution is expected to remain in that range.”
Oliver Russ’ FP Argonaut European Income fund also features in all three AFI portfolios. With a return of 75.72 per cent, the fund has underperformed its average peer since launch but has just beaten the benchmark.
European equities had a strong run at the start of the year after the European Central Bank unveiled its quantitative easing programme. In his latest update, Russ said: “At these levels, it is necessary to have proper regard for valuations, and we have been top-slicing some names where we have made good profits.”
“There are still good value names to be found on a dividend basis though, especially in the banking sector, and equities of course do still offer a yield premium to sovereign bonds.”
There are also two recommended funds focusing on the Asian income story: Newton Asian Income and Schroder Asian Income.
Newton Asian Income is one of the most popular funds in the space but is now managed on a team basis after it was announced that star manager Jason Pidcock is departing to join Jupiter. The fund is managed using Newton’s thematic approach and has a yield criteria to ensure it invests in genuine income plays.
The fund should not be viewed purely as a play on emerging markets as it has around one third of its assets in Australian equities, through holdings such as Transurban Group, Amcor and Sydney Airport. It also has 16 per cent of assets in Singapore, 10 per cent in Hong Kong and 9 per cent in Taiwan.
Richard Sennitt’s Schroder Asian Income, on the other hand, has more than a quarter of its portfolio in Hong Kong and is underweight Australia, with overweights to Singapore, Taiwan and Thailand.
“There are quite a lot of things to like about this fund. Foremost, we think highly of the manager, who is a skilled investor and has followed the Asian markets for a considerable amount of time,” Square Mile said.
“He has a fine appreciation of the nuances of investing in these markets and the opportunities that can emerge when investors throw the baby out with the bath water in volatile periods. He maintains a sensible investment approach with a strict focus on company fundamentals and valuation levels.”
Bonds
So far all of the funds mentioned have invested in equities but most investors will want some fixed income exposure in their portfolios to offer diversification. There is only one bond fund that has made it into all three AFI portfolios and that is FE Alpha Manager Richard Woolnough’s M&G Optimal Income fund.
With assets of £23.6bn, the fund is one of the largest in the Investment Association universe and a firm favourite with investors. The fund has dropped into the third quartile of the IA Sterling Strategic Bond sector over one year but is in the second quartile over three and the first quartile over five.
Performance of fund vs sector since launch
Source: FE Analytics
Woolnough was recently named FE Alpha Manager of 2015, thanks to the M&G bond star’s ability to consistently add value to his investors’ money over time. His fund is the best performing in the sector since its launch in December 2006, posting an 89.33 per cent total return.
http://www.trustnet.com/News/591530/richard-woolnough-named-fe-alpha-manager-of-the-year/
Rob Gleeson, head of FE Research, said: “The FE Alpha Manager awards try to identify which managers are capable of adding value to their portfolios over time regardless of market conditions.”
“Of the 2,000 plus managers on the FE database, Richard Woolnough ranks number one and has done for some time. No other manager has been able to demonstrate the same consistency, adding 1 or 2 per cent to his funds repeatedly year after year.”
Alternatives
Aside from bonds, investors also look at alternative assets to diversify their portfolios and offer a source of uncorrelated returns. The Kames Property Income fund is one portfolio that fits this bill and is in all three AFI portfolios.
Managed by Alex Walker and David Wise, the fund only launched in March 2013 and has returned 9.21 per cent since. Although it is below the average return in its sector, it is important to note that some of its peers invest in property shares which offer the potential for higher returns but are much more volatile than bricks and mortar funds, as the below graph shows.
Performance of fund vs sector since launch
Source: FE Analytics
Unlike many of the funds in the IA Property sector, the fund looks far beyond London and south-east for investment opportunities. For example, the north-west is the largest geographic allocation at 32.37 per cent, followed by Scotland, the north-east and Yorkshire & Humberside.
Speaking recently on the fund’s one-year anniversary, the manager said: “Last year was an exceptional one for property returns. While we do not expect total returns for the next 12 months to be as high, we do expect a strong performance as prices continue to rise and rental growth broadens out to the regions.”
“Our belief is that the secondary area of the market offers the greatest return prospects. This is a function of the higher yields in secondary property and elevated yield gap between prime and secondary assets.”
