Record income payment for VT Chelsea Managed Monthly Income fund

20 August 2024 - The VT Chelsea Managed Monthly Income fund was launched in June 2017 and has provided investors with a stable monthly distribution, which has grown over time.

Over the past seven years the fund has returned more than double the average of its peer group, the Investment Association Mixed Investment 20-60% Shares sector (49.4% vs. 21.6%)*. It is pleasing that it has delivered a consistently strong distribution to investors on this fund*.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and the ISA and tax rules can change. Neither Chelsea nor Valu-Trac Investment Management Ltd offer financial advice and so you must manage your ISA yourself.

The largest ever final distribution

The distribution that is paid out to investors is produced from the income received from the fund’s underlying holdings. The total income from all the holdings is the Monthly Income fund’s distribution yield. As an example, if the fund’s indicated yield is 5.5%, and the current market value of the investor’s investment is £100,000, they would expect to receive roughly £5,500 over the year. The actual yield may change slightly, depending on the performance of the underlying investments throughout the year.

There are two units of the fund that you can invest in - the accumulation unit and the income unit. With accumulation units, income that is generated from different holdings in the fund each month will be automatically reinvested, which will help grow the overall capital value of your investment. However, with income units, the income produced is paid monthly to you in cash in eleven smooth payments and one final distribution.
The VT Chelsea Managed Monthly Income fund has gone from strength to strength and the yield is now 5.96%.

History and how this return has been achieved

The 4.7x final distribution is an excellent return for the fund, but this is not normal. It has historically been between 2.5x-3x, but the fund has had an excellent year for income with interest rates remaining elevated across the developed world.

That has only been part of the reason, the other has been the ability of an Investment Manager to lock-in elevated yields across a number of investment trusts. Investment trusts have faced a number of challenges in a rising rate environment – which is the main reason why the performance has been a bit more muted in the past 12 months from a capital growth perspective. REITs (real estate investment trusts), music royalties, renewables and infrastructure all underperformed in this environment; but they all offered strong yields, which has been able to be to locked into the portfolio.

One of the biggest achievement’s in the fund’s life has been the ability to protect those distribution levels for investors. For example, almost every fund had to cut its distribution during Covid – the fund did not as it was able to move into various sectors and asset classes that were less subject to cuts to protect the fund’s assets.

This is part of the Investment Management of a the fund. To ensure the stability of the distribution returns, the income stream is diversified across several different sectors, asset classes and geographies. There is actually between 35-40 different income sources within the fund.

These sources of income are extremely different – they can range from government bonds and global equity income funds to specialist investment trusts, such as renewable energy (windfarms and solar panels) – with the likes of Greencoat UK Wind (which invests into bioenergy, renewable heat, solar and wind energy infrastructure in the UK) or Assura, a specialist property company that buys surgeries). Doric Nimrod 2 and Doric Nimrod 3, two trusts which lease and sell aircraft, have also been big income players for the fund.

Within equities the fund is as widely diversified as possible globally.

The risk-off bond play amid geopolitical uncertainty

The fund also has bond exposure – this is an asset class that the fund has increased exposure towards the end of the rate rising cycle and then waited for rate reductions to start. While bonds in general may yet provide opportunity – this fund has been exposed to government bonds over the last six months because the spread over government to corporate bonds does not represent great value in most parts of the market (corporate bonds are not cheap).

The other reason for owning government bonds is due to the heightened geopolitical tensions - such as the ongoing Ukraine-Russia and Israel-Palestine conflict. If there is a risk-off environment investors may flood to government bonds and they continue to pay a reasonable yield.

We’d like to thank our clients for their continued support. We promise to continue to do our best to offer a portfolio that provides both a strong and consistent income with capital growth. In the meantime, we hope that investors enjoy this year’s payments.

*Source: Investment Association, figures in pounds sterling, figures from 16 August 2017 to 16 August 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund advisor and do not constitute financial advice.

Valu-Trac Investment Management Limited manages the VT Chelsea Managed Monthly Income fund, Chelsea Financial Services are Investment Advisors to the Fund. Valu-Trac Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FCA), registration number 145168.