With 2016 looming on the horizon, many income investors may wish to opt for an outsourced portfolio to meet the many challenges facing global markets.
Rising US interest rates, tense geopolitics, a US presidential election and a possible ‘Brexit’ vote in the UK make next year a course with plenty of reasons to expect volatility or perhaps even a crash.
Multi asset income, as a theme, has become increasingly popular over recent years thanks to the historically low bond yields on offer, ultra-low interest rates, an ageing population and the recent changes to the pension system.
However, though swathes of groups have launched funds into the space, there can be huge differences in regard to how managers run their multi asset income portfolios.
For those who are considering using such a vehicle, in this article we look at two well-regarded funds of funds specialising in paying out a stable and ideally growing amount of income by investing in a range of asset classes: the £4bn Jupiter Merlin Income and £1.1bn F&C MM Navigator Distribution funds.
According to FE Analytics, from a total return point of view over the longest comparable period Jupiter Merlin Income is the better performer returning 47.88 per cent compared to 43.53 per cent, however both beat the FTSE All Share index as well as a smoother ride.
They also both have beaten the IA Mixed Investment 20%-60% Shares sector average by more than 10 percentage points over this period although the former is in the top quartile and the latter is just in the second.
Performance of funds since October 2007
Source: FE Analytics
From an income perspective however, F&C MM Navigator Distribution has trounced Jupiter Merlin Income from the point of view of cumulative and annual income pay outs.
Looking at the most number of full calendar years both portfolios have existed within – 2008 to 2015 - our data shows a principal investment of £10,000 would have resulted in a pay-out of £4,163 compared to £2,598 for the Jupiter Merlin Income portfolio.
Income paid out 1 January 2008 to 31 December 2014
Source: FE Analytics
As the chart above shows, F&C MM Navigator Distribution has a good track record of increasing its annual pay-outs as well. While it has had to reduce its dividends in two of the years highlighted, those cuts have been miniscule.
The fund has been managed by Gary Potter and Rob Burdett since its launch but the pair have worked together since 1996.
The pair invest across a wide variety of assets including open ended funds, closed ended specialist investment companies and structured products.
They currently have just over 50 per cent in equities, 31.59 per in fixed interest, 7.79 per cent in property and the rest – 9.74 per cent – in cash.
The analyst team at Square Mile say Potter and Burdett have a “sensible” approach to investing and balance asset allocation calls with a more qualitative approach of buying fund managers they believe display talent.
For example, some of Potter and Burdett’s largest fund bets include the likes of RWC Global Enhanced Dividend, BlackRock Continental European Income, Ardevora UK Income and PFS TwentyFour Dynamic Bond.
The portfolio has beaten the sector in five out of the last seven calendar years which has helped the fund to a lower maximum drawdown than the sector. It is also top quartile for its risk adjusted-returns, as measured by its Sharpe ratio, since inception.
It has also beaten the sector over three years. Over the past one year both funds under discussion are just ahead of the index and sector but for Jupiter Merlin Income, a tricky period 2014 means over three years it has lagged both.
FE Alpha Managers John Chatfeild-Roberts and Algy Smith-Maxwell have headed the fund for more than 15 years over which time they have clocked up top decile returns and build up a sturdy reputation.
The FE Research team have put the fund on the FE Approved list of recommended funds and analyst Charles Younes says the fund is a good one stop shop for multi-asset income investors.
“They tend to look for the best fund managers and at the moment it is mostly UK equity income funds that make up most of the portfolio such as CF Woodford Equity Income, Artemis Income and Royal London UK Equity Income,” he said.
“However, they do also have some fixed income but it tends to be more unusual or strategic bond funds such as M&G Strategic Corporate Bond, Hermes Multi Strategy Credit and Kames High Yield Bond. They also have their own property fund in the portfolio and some gold.”
Currently, Jupiter Merlin Income is 51.66 per cent equities, 34.03 per cent fixed interest with 14.09 per cent made up of alternatives most of which is property and gold.
Alex Farlow, head of risk based solutions research at Square Mile says the portfolios are quite distinct but says for the very income focused F&C MM Navigator Distribution is preferable.
“Whilst both funds sit in the same IA Mixed Investment 20%-60% Shares sector and have similar restrictions with regards to asset class limits, there are some subtle differences between them,” he said.
“F&C Navigator Distribution has a specific income objective, and aims to deliver an income which is in the top 10 per cent of distribution funds in the sector. Jupiter Merlin Income aims to deliver a sustainable level of income and has more of a total return focus.”
“In terms of investors, those looking for a high level of income and moderate growth would be better suited to F&C Navigator Distribution whereas Jupiter Merlin Income may be more appropriate for those who require a more moderate but sustainable level of income along with capital growth.”
Jupiter Merlin Income has a current yield of 3.1 per cent and has a clean ongoing charges figure [OCF] 1.54 per cent. F&C MM Navigator Distribution has a current yield of 4.7 per cent and a clean OCF of 1.47 per cent.