While there is certainly sense in holding more than one equity income or bond portfolio in order to diversify risk, the similarities among these products – particularly in the UK Equity Income sector – mean that investors may feel the need to look elsewhere.
Here are three options you may want to consider:
Small cap income
With the likes of Vodafone, GlaxoSmithKline and BP making at least a top-10 appearance in the vast majority of UK Equity Income portfolios, the sector has been accused of being over-reliant on a handful of high-yielding stocks.
Within the sector, there are a couple of smaller cap-focused portfolios that generate their income from a greater pool of companies, which means they are less susceptible to a dividend cut if any one particular stock suffers a BP-style set back.
The two standout funds are Unicorn UK Income and PFS Chelverton UK Equity Income, which are both top-decile performers over a three-year period, with returns of 86.14 and 68.75 per cent respectively. They have a one-year historic yield of 4.7 and 6.3 per cent respectively.
Performance of funds vs sector over 3-yrs
Source: FE Analytics
FE Alpha Manager John McClure’s Unicorn UK Income fund is also a top-decile performer over five years.
Given the small cap-focus of these funds, both tend to be more volatile than their sector average, but only marginally. Neither fund has any FTSE 100 stocks in its top-10 holdings, and in a recent interview with FE Trustnet, Chelverton’s David Taylor said he wouldn’t hold one in his portfolio.
Both FE five crown-rated funds have a minimum investment of £1,000. With a total expense ratio of 1.25 per cent, Taylor’s portfolio is one of the cheapest actively managed funds of its kind. Unicorn UK Income has a TER of 1.6 per cent.
Property
While extremely out of favour with the majority of investors, there are some good options in the IMA Property sector with decent yields and the potential for capital growth.
Five funds in the sector pay out more than 4 per cent, including Schroder Global Property Income Maximiser, which has a yield of 6.99 per cent.
In spite of its unpopularity, the sector has held up relatively well since the lows of 2008. With returns of 32.62 per cent, it has only marginally underperformed the All Share over three years and it has protected more effectively against the downside over the past year.
First State Global Property Securities and BNY Mellon Global Property Securities have been the standout performers over these two periods. Both have managed to break even in the last 12 months, and returned in excess of 65 per cent.
The Freehold Income Trust, which sits in the IMA Specialist sector, is also an option.
The fund attempts to provide a secure and stable return primarily through acquiring freehold ground rents which offer an attractive income stream and capital growth prospects. It has a target yield of 4.25 per cent after charges, but the yield is slightly higher than this at present.
It has an unbroken track record of positive returns over 18 calendar years and has consistently outperformed cash, gilts and inflation over these periods.
Performance of trust vs indices over 10-yrs
Source: FE Analytics
It was recently crowned the best risk/return fund of the decade by an FE Trustnet study. With returns of almost 100 per cent, an annualised volatility of 1.76 per cent and a Sharpe ratio of 1.41 over a 10-year period, no fund has come close to matching Nigel Ashfield’s portfolio.
Unfortunately, the fund’s status as an unregulated collective investment scheme (UCIS) means that it is out of reach of most IFAs, since the FSA does not look favourably upon its poor liquidity.
However, it can be accessed directly by investors. It has a minimum investment of £5,000 and a total expense ratio (TER) of 1.9 per cent.
Infrastructure
While there aren’t many pure infrastructure plays in the open- and closed-ended universes, a growing number of advisers are becoming more accustomed to recommending these products as an alternative source of income.
Infrastructure companies tend to have predictable cash flows – often in highly regulated markets – which provide a competitive, inflation-linked income stream.
In the IMA universe, the best-known fund is probably First State Global Listed Infrastructure, which has a yield of 3.07 per cent. The FE five crown-rated portfolio is headed up by Peter Meany and Andrew Greenup and has delivered 18.5 per cent since its launch in October 2007. It has a minimum investment of £1,000 and a TER of 1.64 per cent.
The popularity of infrastructure portfolios is reflected in their status within the AIC universe: all but one of the seven infrastructure trusts in this space are currently trading on a premium.
The £1bn 3i Infrastructure trust is the largest of the seven and has the longest proven track record, though many experts are tipping the much younger and smaller John Laing Infrastructure portfolio to be a star of the future.