Asset allocation is likely to be a more nuanced decision in 2016 compared with 2015, according to Eugene Philalithis (pictured). 
The FE Alpha Manager, who is a multi-asset portfolio manager at Fidelity and heads up Fidelity Solutions’ Fixed Income & Alternatives Research team, says that growth should remain stable but there will still be potential for volatility which could come from either the US tightening cycle or the slowdown in China.
As such, he believes that asset diversification within a portfolio will be even more important as we head into the New Year. In the below article, Philalithis tells FE Trustnet which funds utilise different areas of the market particularly well for those looking for a diversified income stream.
UK Corporate Bond Funds: Henderson Strategic Bond
“Strategic bond funds invest across a range of income generating assets in an effort to diversify sources of risk and ensure a consistent level of income,” the manager said.
“As such, they can be a good choice for income-seeking investors, particularly with risks around bonds from Fed rate rises and the potential for heightened volatility in 2016.”
The Henderson Strategic Bond fund is headed up by FE Alpha Manager duo John Pattullo and Jenna Barnard, and has outperformed its sector average by 15.36 percentage points since Barnard became co-manager in 2006, having achieved a total return of 61.99 per cent.
Performance of fund vs sector over management tenure
Source: FE Analytics
It is in the third quartile for its annualised volatility and its downside risk over the same time frame though, suggesting the four crown-rated fund may not be suitable for very cautious investors.
“The fund has an unconstrained approach to investing across government, investment grade and high yield bonds, basing their allocation to each on the stage of the economic cycle,” Philalithis continued.
“The fund benefits from a well-resourced team, with active support from the wider fixed income team at Henderson.”
Currently, the £1.4bn fund has its largest weighting in investment grade and high yield bonds, with only a 9 per cent in government bonds. It also has a 15.53 per cent cash holding, which the managers have recently began deploying as a result of widening credit spreads.
Henderson Strategic Bond has a clean ongoing charges figure (OCF) of 0.7 per cent and yields 4.5 per cent.
High Yield: JPM Global High Yield Bond
The £153m JPM Global High Yield Bond fund has approximately 500 holdings, more than 86 per cent of which are based in the US. The fund is also denominated in dollars, and is designed for investors who are looking for exposure below investment-grade bonds but carry a higher risk compared to investing in government and agency bonds.
“The JPM Global High Yield Bond fund is co-managed by Robert Cook and Thomas Hauser, with additional input from another portfolio manager who has a particular focus on European high yield,” Philalithis said.
“The fund follows a purely bottom-up approach, with a strong emphasis on security selection to drive returns. This requires in-depth research, and with nine credit analysts, the fund is certainly well positioned to achieve this. While the portfolio is run on a team basis, the portfolio managers oversee day-to-day portfolio management and are ultimately responsible for the final investment decisions.”
The fund is in the bottom quartile over one and three years, and is in the third quartile over five and 10 years.
Over the managers’ tenure, it has returned 50.85 per cent, underperforming its IA High Yield Sterling sector average by 13.89 percentage points.
Performance of fund vs sector over management tenure
Source: FE Analytics
It is also in the bottom quartile for its annualised volatility over one, three and 10 years. However, it does boast a yield of 6.93 per cent, and JP Morgan suggests the fund should be held for between five to 10 years because of the higher volatility of high yield bonds.
The fund has a clean OCF of 0.73 per cent.
Global Equity Income: Invesco Perpetual Global Equity Income
“For those looking for a global equity income fund, Invesco Perpetual’s offering represents an attractive choice,” Philalithis said.
“The fund is run by a group of seasoned fund managers who operate on an unconstrained, bottom-up stock picking approach. This means the team can invest in dividend-paying companies across the world, focusing on those companies with good cash flow and sustainable dividends.”
Currently, the fund’s largest holding is in BT Group at 3.46 per cent, followed by Swiss pharma company Novartis at 3.32 per cent, British American Tobacco at 3.08 per cent and Legal & General Group at 3.03 per cent.
These are four of 54 holdings within the portfolio, more than a third of which are in continental European countries. The £775m fund also has a 28.57 per cent allocation to the US and a 26.04 per cent allocation to the UK, as well as smaller weightings in the Pacific Basin, Japan and Australasia.
It is managed by Nick Mustoe and the IP Global Income Group and, over this time frame, it has returned 33.64 per cent, outperforming its peer average in the IA Global Equity Income sector by 7.91 percentage points.
Performance of fund vs sector over management tenure
Source: FE Analytics
It also achieved top quartile annual returns in 2010, 2011 and 2013 despite falling into the third quartile last year.
Invesco Perpetual Global Equity Income has a clean OCF of 0.92 per cent and yields 3.35 per cent.
UK Equity Income: Artemis Income
Artemis Income is managed by Nick Shenton and FE Alpha Managers Adrian Frost and Adrian Gosden. Despite underperforming its sector average over one, three and five years it has delivered a strong longer term performance, providing a total return of 92.66 per cent over the last decade and outperforming its peer composite by 13.26 percentage points.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“The managers’ process focuses on companies able to generate free cash flow, an important factor in maintaining and increasing dividend pay-outs to shareholders,” Philalithis explained.
“They have a particular focus on business models where cash flow is sustainable and growing. For investors who like a diversified portfolio, the fund also has the remit to invest up to 20 per cent in European equities and up to 10 per cent in bonds.”
Currently, the £6.8bn fund has a 6.1 per cent weighting in continental Europe and 4.55 per cent in North America. It also has a 0.33 per cent weighting in fixed interest assets and 1.57 per cent in cash in addition to its equity holdings
The fund is able to buy into assets across the market cap spectrum but invests primarily in blue-chips, and bought into the likes of Aviva, Royal Mail and GE last month.
Artemis Income has a clean OCF of 0.79 per cent and yields 3.77 per cent.
Asset allocation is likely to be a more nuanced decision in 2016 compared with 2015, according to Eugene Philalithis (pictured).
The FE Alpha Manager, who is a multi-asset portfolio manager at Fidelity and heads up Fidelity Solutions’ Fixed Income & Alternatives Research team, says that growth should remain stable but there will still be potential for volatility which could come from either the US tightening cycle or the slowdown in China.
As such, he believes that asset diversification within a portfolio will be even more important as we head into the New Year. In the below article, Philalithis tells FE Trustnet which funds utilise different areas of the market particularly well for those looking for a diversified income stream.
