Skip to the content

Gary Potter: Three obscure funds that have sent our income soaring

26 September 2014

F&C’s Gary Potter reveals the out of the ordinary income funds that have sent the dividend pay-out soaring in the F&C MM Navigator Distribution fund.

By Jenna Voigt,

Editor, FE Investazine

Investors historically have turned to bonds, equities and cash to deliver a steady and sustainable income over time, but F&C’s Gary Potter says because the old guard has been turned on its head with cash yielding negative real returns and bonds paying record low yields, investors need to look elsewhere for dividends.

ALT_TAG “There are many more ways of raising income than just those traditional sources,” he said.

“There are many solutions for income. Those that seek income want stability in their assets that can let the income do the talking.”

Potter, who runs the four FE Crown-rated F&C MM Navigator Distribution fund alongside Rob Burdett, says using a number of ‘off-the-wall’ funds to diversify income exposure has helped the fund be one of the most consistent multi-asset portfolios when it comes to paying dividends.

The manager highlights three little-known funds to diversify your income stream.


Darwin Leisure Property

One of Potter’s favourite funds is Darwin Leisure Property, which aims to maximise total return in sterling terms through a combination of growth and income by investing in the UK holiday park market.

Potter says Darwin Leisure Property started out investing in caravan parks around the UK but is now involved in converting caravan parks over to lodge parks.

“They make upgrades to the facilities and then lodges are available year round. This means the usage is greater [than for caravan parks] and therefore the cash flow is greater,” Potter said.

The fund currently pays a 6 per cent and over the last five years, the fund is up 92.89 per cent while the FTSE All Share is up 62.73 per cent.

Performance of fund and index over 5yrs

ALT_TAG

Source: FE Analytics

The IMA Property sector, by comparison, is up just 39.17 per cent over the period.

However, it is difficult for the average retail investor to directly access the fund. It has a minimum investment of £100,000 and is currently not available via platforms. Potter says he and Burdett are currently the only retail/wholesale investors in the fund.



MedicX IT

Another little-known fund Potter uses to diversify income is the MedicX investment trust, which is yielding 6.85 per cent. The trust invests in primary care properties that are let to GPs and primary care trusts.

“It’s not empty buildings, it’s government-generated cash flow,” Potter said. “There’s steady capital generation. It’s a low-risk income asset.”

Investors should note that the trust is trading on a wide premium of 29.8 per cent – much wider than its three-year average of 19.83 per cent – so it may be worth waiting for the discount to come in a bit before investing.

The trust was trading on a 9.64 per cent premium earlier this year, but on average was trading on a premium of 23.78 per cent.

Medicx has been a standout performer in the IT Property sector over the last five years, returning 63.78 per cent when the sector lost 10.42 per cent.

Performance of trust vs sector over 5yrs

ALT_TAG

Source: FE Analytics

Investors do have to pay for the outperformance; however.

In addition to the wide premium, MedicX has ongoing charges of 2.49 per cent.

Late last year, Cantor Fitzgerald’s Charles Tan warned MedicX’s high headline yield may not be sustainable over the long term.


Starwood European Real Estate Finance IT

Playing on the government-owned theme, Potter also likes the Starwood European Real Estate Finance trust.

Potter says the trust invests in government-backed properties or high quality hotels where the cash flow is “near guaranteed”.

“The government can’t back out. It’s a very solid income. Existing contracts are pretty much watertight,” he said.

The Guernsey-based trust has returned 7.87 per cent since launch in December 2012, trailing the IT Debt sector which made 10.80 per cent.

Performance of trust and sector since launch

ALT_TAG

Source: FE Analytics


As you can see from the chart, the trust has been significantly less volatile than its peers. Over the last year, the trust had annualised volatility of just 1.78 per cent while the IT Debt sector was at 5.32 per cent.

The trust is also trading on a premium of 4.98 per cent. This is wider than its one-year average, but has coming in a bit from its one-year discount low of 7.74 per cent.

The trust has ongoing charges of 0.73 per cent.

The impact of picking non-mainstream funds is “meaningful” to the overall portfolio, Potter says. But he adds it’s not the yield that’s important, it’s the diversification.

“It’s the mix, the diversification, that provides what I call the airbags. The more airbags you’ve got on a car the more likely you are to survive a crash,” he said.

“We’ve got 2,500 different sources of income in this fund, so that’s quite a lot of diversification.”

The four FE Crown-rated F&C MM Navigator Distribution fund aims to provide income with some capital growth.

It has a yield of 4.6 per cent, making it the fifth highest-yielding fund in the IMA Mixed Investment 20% - 60% Shares sector and higher than the average yield of the IMA UK Equity Income sector at 3.9 per cent.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

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.