Stock markets around the world sold off from the beginning of September but have very recently recovered some of their losses; though all major indices are still down from their early September high.
The S&P 500 has stood up the best having lost just 2.97 per cent while the MSCI Europe ex UK is down 8.99 per cent and the MSCI Emerging Markets is down 9.11 per cent.
Performance of indices since 4 Sep 2014
Source: FE Analytics
Volatility has also spiked with the VIX index, known as the ‘fear gauge’, up almost 50 per cent, leaving many investors at a loss and increasingly concerned by capital protection.
Performance of index since 4 Sep 2014
Source: FE Analytics
For the income-hungry investor or for those who depend on regular dividends, this could pose a predicament.
However, here we take a look at the three alternatives funds that scored the highest by FE Research for attractive downside risk, income growth and yield characteristics.
This method for ranking the income qualities of funds was developed by Rob Gleeson’s FE Research team to assess IMA funds’ ability using a broader set of criteria rather than simply looking at yield.
Gleeson and his team score funds out of 300, depending on their performance in three key areas: the stability of their dividend, capital protection and finally dividend yield.
SWIP Absolute Return Bond
Top of the list is this £269m fund managed by James Carver since October 2011. The fund scored 260 out of a possible 300 for its overall income score, with the FE Research team awarding the fund with 96 out of 100 for its capital protection.
It currently only yields 2.3 per cent and that is one of the reasons why its yield score is lower at 76 out of 100.
The stability of its dividend has been stronger, however, as it has been awarded with 88 out of 100.
It is one of the lower risk portfolios in the IMA Targeted Absolute Return sector as it aims to make money over 12 months.
According to FE Analytics, it has returned 9.11 per cent over the past three years, delivering a positive return in each year since Carver has been in charge.
Performance of fund and sector over 3yrs
Source: FE Analytics
However, the fund is down 1.3 per cent in year to date.
Its largest holdings are US and UK government bonds, which make up around 10 per cent of the portfolio, with a slightly smaller position in Brazilian government debt.
It is currently yielding 2.3 per cent and has an ongoing charges figure (OCF) of 0.63 per cent.
Newton Real Return
This £9.2bn fund is the second largest in the sector behind the behemoth £20bn Standard Life Global Absolute Return Strategies and it also comes in second best in FE Research’s income rankings for the sector.
Its income score is 228, scoring 88 for yield and 94 for dividend stability.
It has, however, scored just 46 for its downside protection, as it is one of the more high risk names in the absolute return sector with a traditionally high weighting to equities.
That positioning has helped the fund to deliver more than 100 per cent over 10 years, albeit with relatively high volatility.
Over three years it has been more muted, which is a reflection of FE Alpha Manager Iain Stewart’s bearish outlook.
Stewart and his co-manager Suzanne Hutchins have kept the portfolio positioned in a cautious manner and the fund has exposure to gold as a protection against inflation.
Performance of fund and sector over 3yrs
Source: FE Analytics
The FE Research team say the fund makes a good core holding thanks to Stewart’s ability to protect capital.
“The fund’s main features make it suitable as a core holding in any portfolio: it invests in the main asset classes, regardless of location, and it aims to beat cash once inflation is taken into account,” they said.
“Its only significant weakness is the proportion of institutional investors that hold it: Newton has a privileged relationship with its clients and their turnover is low, but if one large investor was to sell its stake, this could seriously damage the value of the fund.”
However, it says there is an additional risk in the fund’s use of derivatives, despite their utility in weak markets such as 2008 when the fund posted a positive return.
“Newton’s expertise in these complex instruments gives the fund a real edge, but they can also cause real damage if not handled properly.”
It is currently yielding 2.9 per cent and has an OCF of 1.11 per cent.
CF Ruffer Absolute Return
This £2.4bn fund is co-managed by FE Alpha Managers Steve Russell and David Ballance.
It has a diverse blend of holdings including US government debt, gold and equities including 2.2 per cent in the CF Ruffer Japanese fund a further 1.8 per cent in Microsoft stock.
Its total income score is 215, receiving 73 for its yield – which is currently 1.63 per cent – 77 for the stability of its dividend and 65 for its downside protection. Over the past three years it has returned 16.28 per cent.
While it sits in the IMA Unclassified sector by way of comparison it has beaten the other two funds as well as the IMA Targeted Absolute Return sector average over the same period.
Performance of fund and sector over 3yrs
Source: FE Analytics
It has an OCF of 1.22 per cent.
Investors who had placed £10,000 in each of the three funds three years ago would have been most pleased with the Newton Real Return fund from an income perspective, having received £1,038 over the course of the years with the other two funds paying out almost half this amount in income over this period.
Income earned on £10,000 over 3yrs
Source: FE Analytics
