Income investors seeking to protect their portfolios from any worsening in the coronavirus crisis should be looking further afield than core UK equity income funds, according to Quilter Investors’ Helen Bradshaw. 
The coronavirus crisis has had a significant impact on UK income investors, with a swathe of businesses – including some of the country’s biggest payers – cutting, postponed or scrapping their dividends.
With coronavirus cases continuing to climb in the likes of Brazil and India, while the US and Europe are hit by a surge in cases following the reopening of their economies, Quilter Investors income portfolio manager Helen Bradshaw thinks income investors should be preparing now for a potential second wave.
“The dividend challenge in the UK and Europe has been well documented, and with bond yields falling from already low levels, income investors must be feeling like there is nowhere to turn,” she said.
“However, there are ways investors can seek to add more resilience to their income streams, which may be prudent in the event of economic lockdowns returning.”
Utilise investment trusts - City of London
UK equity income fund have felt the collapse in dividends especially strongly, as they have limited ways of covering this shortfall. But Bradshaw noted how the situation is “slightly different” for investment trusts.
“Their fund structure allows them to use revenue reserves to support dividends if there is a shortfall of income,” she said. “This is a helpful feature in leaner years and should mean their dividends are more resilient than their open-ended peers.”
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
She highlighted Job Curtis’ City of London investment trust. This £1.bn trust focuses on UK stocks and is seen as something of a ‘dividend hero’ thanks to a very strong record of distributing cash to its investors.
“Despite all the headlines of dividend cuts and suspensions, City of London just raised its dividend for the 54th year on the trot and is aiming for the same next year too,” Bradshaw pointed out.
“This is an example of where the investment trust fund structure benefits an end investor, allowing it to use revenue reserves to grow its income over the long term.”
City of London has ongoing charges of 0.39 per cent, trading on a 1.9 per cent discount to net asset value (NAV) and is 13 per cent geared, according to the Association of Investment Companies. It is yielding 5.8 per cent.
Widen your net - Hipgnosis Songs
Whereas investors might have once found their income options limited to large-cap stocks and bonds, recent years have seen a plethora of ‘alternative’ investments open up.
The income investing opportunity set has therefore grown in size, depth and breadth and now encompasses a wide range of asset classes such as specialist property, infrastructure, renewable energy and music royalties.
“Not only do alternatives typically have a lower correlation to more mainstream assets, but there are a number that offer an attractive level of income that is less sensitive to the economic backdrop,” Bradshaw said.
Performance of trust since launch
Source: FE Analytics
Hipgnosis Songs is an example of an alternative investment that income investors could consider. The Guernsey-domiciled trust launched in mid-2018 and has built up a strong following since then, growing to £2.5bn.
The Quilter Investors manager said: “Hipgnosis is a unique alternative investment in the fact it buys music catalogues and investors receive an income from the royalties generated from these songs.
“With a fairly eclectic mix of music in the portfolio, including the Kaiser Chiefs and Mark Ronson, income from this investment trust can be a good diversifier within a portfolio given the underlying drivers are less correlated to the economic cycle.”
City of London has ongoing charges of 2.95 per cent, which includes a performance fee. It is trading on a 24.5 per cent premium to NAV, is not geared and is yielding 4.1 per cent.
Diversification – Assura
Bradshaw also pointed to how the coronavirus crisis has reasserted the importance of diversification as a means of protecting total returns volatile markets and boosting an income stream’s resilience in times of market stress.
This is especially importance given the high levels of dividend concentration within the UK equity income space. At the end of 2019, half of the FTSE All Share’s yield came from just 10 companies.
“There are opportunities elsewhere that can help support your dividend stream and lead you away from such concentration risk,” Bradshaw added.
She noted that within the UK property space, opportunities outside the traditional commercial sector can be found to help diversify income streams and gave Assura as an example.
Performance of stock vs index over 5yrs
Source: FE Analytics
“Assura Group is a leading investor and developer in modern purpose-built healthcare properties, principally let to GPs and primary care trusts in the UK,” she explained.
“Its long and inflation-linked leases are effectively government backed and as a result, investors can take confidence that the income will be more resilient despite a more challenging economic backdrop.”
Assura is listed on the FTSE 250 index and is yielding 3.8 per cent.