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Toby Nangle: Where to find income in today's world

15 August 2016

The Columbia Threadneedle multi-asset manager highlights the areas of the market that still offer investors the prospect of attractive income.

 

Finding sustainable and growing income has become more challenging in the current market conditions, although Columbia Threadneedle’s Toby Nangle says that he is seeing good risk/reward opportunities in areas such as European high yield, global equity income and property.

In previous articles we have focused on Nangle’s Threadneedle Dynamic Real Return fund - which resides in the IA Targeted Absolute Return sector - but the manager also runs the Threadneedle Global Multi Asset Income fund.

This fund, which Nangle (pictured) has headed up since its launch in July 2014, sits in the IA Mixed Investment 20%-60% Shares sector and has the aim of generating a sustainable level of income with the prospect of capital growth over the medium to long term.

Like with Threadneedle Dynamic Real Return, Nangle uses an active asset allocation approach when building Threadneedle Global Multi Asset Income’s portfolio. The fund can hold 20 to 50 per cent in equities, 30 to 80 per cent in bonds or cash and 0 to 30 per cent in property, depending on where he sees the most opportune balance between risk and reward.

“This is important in the context of the continuous search for yield that has consumed investors’ appetite for a number of years,” the manager said.

“We are able to position the portfolio to not only where we see yield but where it is sustainable, not only at the overall asset allocation level but within asset classes as well. To an extent it has become somewhat challenging, however, there are opportunities that present themselves as time progresses.”

Nangle’s approach to these “challenging” conditions appears to have worked, with the fund’s 15.66 per cent total return between launch and the end of May placing it fifth out of the 126 funds in the IA Mixed Investment 20%-60% Shares sector.

Performance of fund vs sector between launch and 30 Jun 2016

 

Source: FE Analytics. Total return, bid to bid, in sterling between 31 Jul 2014 and 30 Jun 2016. Returns net of fees. Past performance is not a guide to future performance.

An area that has been of interest to the fund manager is fixed income, especially in the high yield space.


“One such opportunity has been European high yield where we have over the course of 2016 been increasing our exposure as spreads have widened. When spreads typically widen it is usually a sign of danger with investors becoming concerned on the ongoing viability of the business, though the spread widening we witnessed in European high yield was more due to the contagion impact of US high yield rather than any inherent issues within the European market,” he said.

“Looking at the US high yield bond market, circa 15 per cent of it is composed of energy companies, with a number of these falling into distress with low oil prices. Looking at these companies our US high yield team expect 24 per cent of these to default this year and 19 per cent next year; giving a 5.5 per cent and 6.4 per cent default level for overall US high yield index.”

“However, when we look at the European market which has moved in unison with the US non-energy high yield market we see frictional default levels and as such are happy to take an allocation.”

Also in bonds, Nangle and his team have been adding to UK short-dated investment grade credit. They describe this as an “orphan asset class” owing to pension funds disliking it because of its lack of duration and insurance companies avoiding it because of solvency requirements.

Within equities, Threadneedle Global Multi Asset Income retains a holding in Mark Nichols’ Threadneedle Pan European Equity Dividend fund, though this has more recently been reduced post the UK’s vote to leave the UK.

The fund mainly invests in larger European companies with no particular bias towards the growth or value style; it is currently overweight the healthcare, consumer staples, industrial and consumer discretionary sectors through the likes of Novartis, Anheuser-Busch InBev and Nestle.

Performance of fund vs sector and index over 5yrs to 30 Jun 2016

 

 

Source: FE Analytics. Total return, bid to bid, in sterling between 1 Jun 2011 and 30 Jun 2016. Returns net of fees. Past performance is not a guide to future performance.

As the graph and table above shows, the fund has outperformed its average peer and the MSCI Europe index over the past five years.


In addition, Nangle highlights the importance of flexibility when searching for income by noting how the initial yield screen for the Threadneedle Global Equity Income fund was lowered from 4 per cent to 3 per cent last year.

This was due to high profile dividend cuts reducing the opportunity set and it allowed the fund to look for companies that have the ability to grow their payouts over time from a lower starting yield, rather than being constrained to those already showing a high yield.

“The number of companies that met our criteria was reducing and we were being more concentrated in particular areas, by decreasing the dividend screen to 3 per cent we increased the diversification within the fund,” he explained.

Another area of the market that the fund has exposure to is commercial property, through Columbia Threadneedle’s in-house property team.

“Our property franchise is very income orientated given the fact that yield is a dominant long-term impact on the overall performance of property,” Nangle said.

“The team focus on regional aspects of the UK rather than prime central London, as they believe there are greater asset management opportunities in the regions where the team can improve locations and increase overall levels of yield.”

Threadneedle Global Multi Asset Income has a clean share class with ongoing charges figure (OCF)* of 0.92 per cent and is yielding 3.60 per cent.

 

*For more information on charges please refer to the Fund’s prospectus.

Important Information. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The fund characteristics described above are internal guidelines (rather than limits and controls). They do not form part of the fund’s objective and policy and are subject to change without notice in the future. Any opinions expressed by Columbia Threadneedle Investments are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Threadneedle Opportunity Investment Funds ICVC (“TOIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a Non-UCITS scheme. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English only and may be obtained free of charge on request from Columbia Threadneedle Investments at PO Box 10033, Chelmsford, Essex CM99 2AL. Threadneedle Investment Services Limited is registered in England and Wales, Registered No. 3701768, Cannon Place, 78 Cannon Street, London, EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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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.