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Three funds to find income after BoE interest rate cut, according to Architas

14 August 2016

With the Bank of England slashing interest rates, and bonds producing historically low yields, Architas’ Adrian Lowcock suggests three funds that provide decent yields.

By Jonathan Jones,

Reporter, FE Trustnet

It is still possible to build a portfolio of investments which could generate a decent income stream despite historically low interest rates and high-priced bonds, according to Adrian Lowcock, investment director at Architas. 

Last week, the Bank of England announced it was slashing interest rates to a new historic low of 0.25 per cent, while its quantative easing programme was expanded by £60bn to £435bn, with the BoE able to purchase £10bn of corporate bonds.

Lowcock (pictured) says this trend “looks set to continue for the foreseeable future,” but that there are still opportunities “in a low inflation, low growth world”.

He has three keys to making a successful income portfolio, and the first is to make sure it is diversified.

“Getting your income from a broad number of different sources will reduce the volatility of the income you receive and protect against one source drying up,” he said.

Secondly, he says not to chase high yields, as this can mean that there are underlying problems with the business and that the dividend may be cut.

Finally, he says investors should look for funds invested in companies that are growing their dividends.

“If you can, look for companies which have smaller but growing dividends. As a company grows its dividends it will boost the share price, as it attracts more investors, helping to grow your capital.”

Below he highlights three funds that investors should look to add to create a diverse, growing, income earning portfolio.

 

Fidelity Enhanced Income

The fund, run by David Jehan and Michael Clark, has a current yield of 6.4 per cent.

“The core of the fund is a traditional income strategy investing in blue chip UK companies which tend to have attractive and consistent dividends,” Lowcock said.

It also uses covered call options to boost its income pay-outs and published yield, however such a strategy does put a ceiling over potential returns, meaning over the last five years the fund has underperformed its sector and benchmark.

Performance vs sector and benchmark over 5yrs

 

Source: FE Analytics

“Such a strategy does reduce the capital growth potential of the investment, but provides a significant boost to income,” Lowcock said.

The £462m fund has underperformed its sector and benchmark over the last five years, as is to be expected as the market performed particularly well in 2012 and 2013, however, over this period, it has been the least volatile in its sector, and has the lowest maximum drawdown – the amount an investor would have lost is buying and selling at the worst possible moments.


It has also been one of the largest dividend payers in its peer group. For example, investors who bought £10,000 worth of units in the fund at launch in February 2009 would have since earned £5,431.12 in income.

“Given the conservative approach of the managers this fund tends to protect investors better in falling markets and is less volatile than the UK equity market as a whole.”

Fidelity Enhanced Income, which is a mirror image of Clark’s Fidelity MoneyBuilder Dividend fund apart from the covered call options, has a clean ongoing charges figure (OCF) of 0.95 per cent.

Invesco Perpetual High Yield

With gilt yields down at their record lows and interest rates having been slashed, Lowcock says investors can afford to take risk by upping their exposure to lower rated bonds. However, he prefers Invesco Perpetual High Yield given its managers knowledge of the asset class.

“Managers Paul Read and Paul Causer are highly experienced and believe the key to success is on knowing what information is relevant at what time,” Lowcock said.

“The managers combine their economic outlook with stock picking skills to identify bonds which look attractively priced.”

Whilst the £124m fund is predominately investing in European high yield bonds, the managers can hold as much as 30 per cent in investment grade corporate bonds.

Performance vs sector over 5yrs

 

Source: FE Analytics

Unlike the Fidelity Enhanced Income, the Invesco Perpetual fund has outperformed its sector over five years, returning 53.5 per cent compared to the sector average 34.8 per cent. It has also beaten its sector in four of the last five calendar years and paid out more than £2,500 in income on £10,000 over that time.

However, it has been one of the most volatile in the sector, though it is second for its Sharpe ratio – which measures risk-adjusted returns. The fund currently yields 5.86 per cent, with an OCF of 0.75 per cent.


 

Schroder Global Real Estate Securities Income

The third and final fund is the Schroder Global Real Estate Securities fund, run by Tom Walker and Hugo Machin, which Lowcock says offers a diversified income stream within an overall income-focused portfolio.

The fund aims to provide income and capital growth by investing globally in the equities of real estate companies that offer sustainable dividend payments, and currently offers a yield of 4.46 per cent with an OCF of 0.97 per cent.

“[The fund’s] focus is primarily on large cap property companies which offer the greatest liquidity,” Lowcock said, and it includes the likes of British Land and Simon Property Group among its top ten holdings.

“As the fund invests in property shares and not ‘bricks & mortar’ investors don’t share the recent liquidity issues seen in other property funds but in the short term will experience equity like volatility.”

Performance vs sector and benchmark over 5yrs

 

Source: FE Analytics

The £60m fund has outperformed has been the best performing member of its peer group over five years, beating the IA Property sector average by more than 70 percentage points in the process. It has paid out some £3,443.42 in dividends on an initial £10,000 investment made at launch in February 2011.

Its largest regional bets are Australia, Singapore, the UK and Canada while it is underweight the likes of the US and Hong Kong. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.