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Multi-asset funds to build a monthly income portfolio

20 April 2015

In the second article of the series, FE Trustnet constructs a mock portfolio of multi-asset funds that would give investors a monthly dividend-payout as well as the potential for capital growth.

By Joshua Ausden,

Head of FE Trustnet Content

Recent pension reforms have made both UK advisers and investors more likely to buy funds for retirement portfolios, according to the latest FE Trustnet poll.

More than 50 per cent of the 315 advisers and 1,332 private investors said the changes to annuities have increased the likelihood of them buying income-focused funds in their later years, which could result in significant inflows for equity income, multi-asset and bond portfolios. Investors with longer time horizons are more likely to go for the first option, as supported by Neil Woodford who recently argued that equities should be the natural home for the majority of retirement investors

Those with a lower appetite for risk may be more tempted by a multi-asset offering. These funds have the advantage of diversifying your income stream, as they get their dividends from a number of asset classes ranging from equities and bonds to property and infrastructure. This also helps them protect against asset class-specific downturns. 

If investors are considering using multi-asset for their retirement plan and are looking for monthly dividends, they’ve got to make sure they get the right balance of income and capital growth. If you’re 65 there’s every chance you need support for 20 years or more, meaning you need to generate enough capital growth to keep your income payments up to scratch. 

You also need to make sure you have all your bases covered – the typical multi-asset income fund pays a dividend twice or four times a year, which means it’s crucial to hold a basket of different products that deliver an income at different times of the year. 

The following portfolio is merely an example of how investors can build a monthly portfolio of multi-asset funds. It has broad exposure to funds across the three IA Mixed Investment sectors, and includes both fund of funds and single-strategy portfolios.

Core holding

There are a handful of products that have been designed to give investors one-stop-shop access to a multi-asset, monthly income-paying strategy. Among the most established choices, especially with advisers, is the £3.4bn Invesco Perpetual Distribution fund, managed by Paul Causer, Paul Read and Ciaran Mallon.

The trio invest only in equities, bonds and cash, which is why the fund tends to be referred to as a mixed-asset rather than multi-asset portfolio. This hasn’t stopped it from being one of the most consistent funds in the UK from both an income and total return perspective, however. FE data shows it is top quartile in its IA Mixed Investment 20-60% sector over three, five and 10 year periods, and has paid out more dividends than any of its peers over the past. An initial £10,000 investment 10 years ago would have paid out £6,404.43 worth of income.

This dwarfs the income created by pure equity funds such as the Invesco Perpetual High Income portfolio, which has only managed £5,533.86. Distribution’s consistency at paying income was also highlighted in a recent FE Trustnet study

Income earned from initial £10,000 investment

 

Source: FE Analytics

Income is paid at the end of every month, the fund is currently yielding 4.42 per cent and ongoing charges (OCF) currently stand at around 0.9 per cent. The trio recently launched a global version of the fund, which gives investors exposure to bonds and equities from the UK, US, Europe, Japan and emerging markets.


If you’re looking for a genuine multi-asset vehicle, the £292m Premier Multi Asset Monthly Income fund is a decent option. As well as investing in equities, bonds, cash, property and alternatives, managers Ian Rees and Simon Evan-Cook give investors added diversification by investing in other funds.

The one drawback to this is the added charges, which have pushed the OCF up to 1.53 per cent; however, the fund has a strong record of beating its IA Mixed Investment 20-60% sector average and benchmark, achieving top quartile returns over one, three and five year periods, and since its launch in 2009.

Premier Multi Asset Monthly Income only started paying dividends monthly back in 2013, and has so far slightly lagged the Invesco Distribution fund. It aims to pay out identical dividends at the end of every month, paying out all excess income at the end of April, providing investors with a healthy kicker.

The team currently have a significant overweight position in property funds, which have a 20 per cent weighting in the portfolio. Top-10 positions include Schroder Income Maximiser, Argonaut European Enhanced Income and Henderson UK Property.

January, April, July, October

While these one-stop-shop portfolios have been extremely successful at delivering income and growth, there’s always the chance that a manager makes a wrong call. Holding a basket of funds that pay an income at different times of the year alongside your core monthly-paying portfolio helps to nullify this risk.

For the months of January, April, July and October, investors may be tempted by the Kames Ethical Cautious Managed fund and Architas MA Active Intermediate Income fund. The former, which invests in UK equities, bonds and cash, is likely to be of particular interest for ethical investors. Managers Ian Buckle and Audrey Ryan avoid 12 “unethical” themes, including military equipment, alcohol, tobacco and gambling. 

In spite of these constraints, the fund has been one of the best performing funds in its IA Mixed Investment 20-60% sector over the past five years with returns of 67.35 per cent, and is a top quartile performer over one and three years as well.

Performance of fund and sector over 5yrs

 

Source: FE Analytics

The fund very much invests on a total return basis, and it’s not uncommon for the yield to drop below 2 per cent; however, its ability to deliver capital growth as well as income should hold an investor in good stead if they’re investing over the longer-term.

Architas MA Active Intermediate Income is a five-crown rated fund of funds which also sits in the 20-60% sector. Managers Caspar Rock and Stephanie Carbonneil consider not only open-ended funds but also investment trusts, enabling them to get access to niche, uncorrelated portfolios such as John Laing Infrastructure and Medicx.

The fund has achieved top quartile performance over one, three and five years, and is currently yielding 3 per cent.


February, May, August, November

Invesco Managed Income and TB Wise Income could be used to cover the months of February, May, August and November. The first is overseen by Nick Mustoe, who draws on the expertise of income managers working at Invesco Perpetual. Top-10 holdings include Mark Barnett’s UK Strategic Income fund and Causer and Read’s Corporate Bond fund.

This fettered structure has many of the benefits of a traditional fund of funds, but the in-house nature of portfolio selection helps to cut down on costs. The OCF currently stands at just over 1 per cent and the yield is 2.7 per cent.

Performance has been strong thanks to the group’s successful stable of income funds; FE data shows it is top quartile in its 40-85% sector over one, three, five and 10 year periods.

Performance of fund and sector over 10yrs

 

Source: FE Analytics

To help maximise a portfolio’s ability to generate capital growth, Tony Yarrow’s £53m TB Wise Income fund may be of interest. Sitting in the IA Flexible Investment sector, the fund can invest up to 100 per cent in equities. It is historically a genuine multi-asset portfolio however, investing in a range of open and closed-ended funds focused on equities, bonds and alternatives such as private equity and infrastructure. It also has some direct equity positions, such as one currently in HSBC.

Unlike most of the other funds listed here, it is susceptible to underperforming during down markets, thanks in no small part to its high investment trust weighting. Yarrow’s ability to add significant value during rising markets has helped the fund top the tables over the longer-term however, and its income record is also strong.

Wise Income is currently yielding 4.63 cent and has an OCF of 1.34 per cent.

March, June, September, December 

The mock portfolio finishes up with two more fund of funds in the form of Schroder MM Diversity Income and F&C MM Navigator Distribution, which both cover the months of March, June, September and December from a dividends point of view.


Both funds sit in the IA Mixed Investment 20-60% sector, and tend to look off the beaten track for income sources. Boutique funds make up a big proportion of both multi-asset funds, with Schroders currently backing the likes of RWC Enhanced Income and Majedie Tortoise, and F&C backing Ardevora UK Income and PFS TwentyFour Dynamic Bond.

Performance of funds and sector over 5yrs

 

Source: FE Analytics

The funds have delivered similar returns over the past five years, but their outperformance has come at different times. MM Diversity Income tends to outperform during falling markets but lag on the way up, which can be seen by its flatter period of returns in recent months.

Managers Marcus Brookes and Robin McDonald currently have a very dim view of both equity and bond markets, resulting in them building up 25.62 per cent in cash. This has contributed to the fund’s yield to drop below 3 per cent.

F&C MM Navigator Distribution has a very different risk/return profile, with most outperformance coming during rising markets. The fund is currently yielding 4.3 per cent. It is a little more expensive than its rival, charging 1.41 per cent compared to 1.21 per cent.
 

In the previous article in the series FE Trustnet constructed a mock portfolio of equity funds that paid a monthly income. Next up we’ll look at bonds.  

 

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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.