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The funds that income-hungry investors should consider for 2020

24 December 2019

Trustnet asks a panel of advisers and fund pickers which income strategies they think investors should add to their portfolio next year.

By Rob Langston,

News editor, Trustnet

JO Hambro UK Equity Income, Man GLG UK Income and Baillie Gifford Japanese Income Growth are among the funds recommended by fund pickers and advisers for investors looking for attractive levels of yield.

With interest rates looking likely to stay low for the foreseeable future, investors are still having to work hard to try and find income elsewhere.

As such, Trustnet asked five fund pickers which funds they would recommend to income-hungry investors in 2020.

 

Jason Hollands – JOHCM UK Equity Income

First up is Tilney managing director Jason Hollands, who has chosen the £3bn JOHCM UK Equity Income fund, a multi-cap strategy with a value bias overseen by James Lowen and Clive Beagles.

Following December’s general election, Hollands said that the fund could perform well “if the UK’s current political anxieties lift in the coming weeks”.

“All stocks in the portfolio must have a higher prospective yield than the FTSE All Share, which is a more disciplined approach than many income funds,” he said.

“That said, the managers make their own dividend forecasts, so they can invest in non-yielding stocks they believe will introduce dividends.

“Stock turnover is relatively low – around 50 per cent per annum – and any stock whose yield falls below that of the index will be sold.”

Performance of fund vs sector & benchmark over 3yrs

 

Source: FE Analytics

The fund has made a 23.04 per cent total return over the past three years (to 17 December), slightly underperforming the FTSE All Share’s 23.67 per cent but greater than the 19.99 per cent gain for the average IA UK Equity Income peer.

It has an ongoing charges figure (OCF) of 0.79 per cent and a yield of 5.39 per cent.

 

Andy Parsons – Man GLG UK Income

Next is The Share Centre head of investments Andy Parsons, whose selection is a popular one amongst advisers: Man GLG UK Income, the five FE fundinfo Crown-rated fund overseen by Alpha Manager Henry Dixon since 2013.

“Dixon operates a disciplined investment process, seeking to invest in undervalued companies with a yield of at least that of the market,” said Parsons. “He prefers companies with net cash balance sheets and robust free cash flows – leading to greater potential for favourable dividend surprises.”

Parsons added: “The fund has a varied market-cap exposure, differentiating it from a large number of peers, which puts it in a good position to deliver competitive returns should the UK see increased investment flows in 2020 while also delivering a very competitive yield.”

Dixon targets a level of income in excess of the FTSE All Share and to outperform over rolling five-year periods.

Performance of fund vs benchmark & sector over 5yrs

 

Source: FE Analytics

Man GLG UK Income has made a total return of 76.53 per cent over the past five years, outperforming both the FTSE All Share (48.47 per cent) and the IA UK Equity Income peer group (42.35 per cent).

It has a yield of 5.07 per cent and an OCF of 0.9 per cent.

 

Adrian Lowcock – Baillie Gifford Japanese Income Growth

Moving away from UK equities, Willis Owen’s Adrian Lowcock has opted for something slightly different for income investors next year with Baillie Gifford Japanese Income Growth.

The £702.3m Baillie Gifford Japanese Income Growth fund is co-managed by Karen See and Matt Brett and targets a total return – in sterling terms – in excess of the Topix over rolling five-year periods while maintaining a portfolio yield in excess of the Japanese benchmark.

“Careful stock selection is paramount and the managers also consider industry trends and themes such as technology and demographics,” said Lowcock.

“The current yield is modest, at around 2 per cent, but there is scope for this to increase as Japanese companies adopt a dividend-paying culture. The focus is on those with strong balance sheets and commitment to growing dividends.”

Performance of fund vs sector & benchmark since launch

 

Source: FE Analytics

Since launch in July 2016, Bailie Gifford Japanese Income Growth has made a total return of 49.95 per cent compared with a 41.58 per cent gain for the Topix and a 40.55 per cent rise for the average IA Japan fund.

It has a 0.62 per cent OCF and is yielding 2.20 per cent.

 

Tom Sparke— VT Gravis UK Infrastructure Income

Tom Sparke – investment manager at GDIM Discretionary Fund Managers – also opted for something a bit different with VT Gravis UK Infrastructure Income, an infrastructure-focused equity fund.

The fund is managed by William Argent and has an unofficial target of 5 per cent per annum. A minimum of 75 per cent of the portfolio will be supported by government-backed or regulated cash flows, while it also has a minimum of 80 per cent invested in completed or operational assets.

“The Gravis UK Infrastructure Income fund has been an excellent source of capital preservation and income this year and I would expect it to continue its impressive progress in 2020,” said Sparke.

“The fund invests in UK-based infrastructure projects and as such, holds low-volatility investments that often have a government funding element and can involve an element of inflation-linking too.”

He added: “The fund has really outperformed in 2019, returning over 14 per cent to investors and its low level of volatility should continue to make it an attractive option for income-seeking portfolios.”

Performance of fund since launch

 

Source: FE Analytics

VT Gravis UK Infrastructure Income has made a 39.99 per cent total return since launch in January 2016.

It has a yield of 4.26 per cent and an OCF of 0.75 per cent.

 

Rob Morgan – International Public Partnerships

Charles Stanley Direct pensions and investment analyst Rob Morgan has also chosen an infrastructure strategy albeit one in the closed-ended fund sector, International Public Partnerships.

“Managed by Amber Infrastructure Group, it invests directly and indirectly in public or social infrastructure assets and related businesses located in the UK, Australia, Europe and North America, though is over two-thirds invested in the UK,” said Morgan.

“Increasingly there is a focus on green infrastructure projects including the transmission from offshore wind farms, and the managers have a strong record of sourcing deals from a diverse range of areas.

“Investments have included gas distribution, wastewater, rail operations, schools, health facilities and various other public sector buildings.”

Targeting sustainable long-term returns and growing dividends, International Public Partnerships currently pays a fully covered yield of 4.4 per cent, which Morgan said should rise over time because many of the underlying investments have inflation linkage.

“It offers all-important diversification away from equities and bonds for those who desire a high income and a degree of inflation protection,” he added. “It is sensitive to movement in gilt yields, but ultimately should be a good diversifier for many investors.”

While a significant weighting to UK regulated assets was reason for some uncertainty in the past few years as the threat of a Jeremy Corbyn-led government could have changed the operating landscape, said Morgan.

“However, those doubts have likely been extinguished and although political uncertainty hasn’t gone away, the large investment trusts in the sector, and private investment generally, have an important role to play in building, updating and operating the nation’s vital infrastructure – and that’s not likely to change,” he concluded.

Performance of trust vs sector over 3yrs

 
Source: FE Analytics

Over three years, International Public Partnerships has made a return of 21.81 per cent compared with a 28.66 per cent gain for the IT Infrastructure peer group.

The £2.4bn trust is currently trading at a premium to net asset value (NAV) of 11.1 per cent, is not geared and has ongoing charges of 1.17 per cent.

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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.