A hidden monthly income gem, September 2022

Last week, Darius McDermott and James Yardley, two of the investment advisers to the VT Chelsea Managed fund range, met with eight financial journalists to show-case the funds, which now have a five-year track record.

VT Chelsea Managed Monthly Income fund, the posterchild of the four funds, was later described by one journalist as a “hidden monthly income gem” to his audience of professional paraplanners – the people who prepare client reports and make recommendations for financial advisers.

The fund has been consistently in the top five of its peer group, the IA Mixed Investment 20-60% Shares sector, over 1, 3 and 5 years*. Since launch it is number one*. It paid a yield of 4.78% for the last 12 months to the end of June – with growth in income of 14.9% since launch**.

In the session, Darius and James talked about the funds’ performance, the investment strategy, and their view of the current market. Here, we give a round-up of their comments.

Launched exclusively for Chelsea clients

The four funds were launched in June 2017 and were originally for Chelsea’s clients who did not want to build their own fund portfolios, preferring a managed fund of funds instead.

James said: “When the funds were launched we were conscious that fund of funds have a reputation for being expensive and our clients are very cost conscious, so we strive to keep the charge as low as possible, through fund costs, trading funds and trading opportunities – the AMC is just 0.3%.”

What investments have been held

Underlying funds that have been in the portfolios since launch include Fidelity Global Special Situations, which James described as a “good core global fund, that is not wedded to one style”, and Schroder Asian Income, which has the same characteristics and a decent yield.

While the bulk of the investments are open ended funds, the team also uses a number of investment trusts to help generate returns for the funds. Examples have been Impact Healthcare REIT, “which the fund bought when very few people had heard of it, and although it’s boring, it has done its job very nicely and paid an increasing dividend to boot”, said James.

Greencoat UK Wind trust is another example. “It derives income from two sources,” explained Darius. “The first is from government subsidies, which are RPI linked, and the second is from the sale of energy, and is delivering 5%+ yields growing with inflation.”

Other alternative investment trusts that the portfolios have had exposure to include shipping, music royalties, aircraft leasing and digital infrastructure. The portfolios have been slightly more volatile than their peers as a result of the trading in these trusts, but they have also been a good source of outperformance and have kept income diversified.

Some investments that did well early in the life of the portfolios, such as the Baillie Gifford offerings, have suffered more in recent times as their growth style of investing has gone out of favour. But both Darius and James defended the strategies to journalists. “They have not turned into bad managers overnight,” they said. “The style is out of favour, and they’ve had a really tough year, but over the long term they are still very good and have behaved as you would expect in this environment.”

The outlook for markets

Broadly speaking, the funds currently have the lowest weighting to equities since they launched. “Markets are tough,” said Darius. “It is difficult to find good things to invest in. Traditionally uncorrelated assets have all gone down together; so old-style equity/bond portfolios aren’t working, bonds have crashed, gold has struggled and index-linked gilts, which are supposed to be a safe haven in inflationary period, have been a disaster.”

“We’re seeing a divergence between the US and the UK/Europe, due to the Federal Reserve (the US central bank) taking bolder action on inflation, whereas, frankly, in the UK/EU the central banks have been asleep at the wheel,” added James. “The Bank of England can’t cut rates to improve the economy as it has to support the pound, as a weaker pound will lead to the UK importing inflation. We see little chance of a soft landing and there is a high chance of a first proper credit cycle since 2008, as QE won’t bail us out this time.”

According to the team, areas to avoid at least short-term are investments with exposure to the consumer and which are over leveraged.

While James is not a fan of Chinese equities right now due to geopolitical risks, or emerging markets generally as the US dollar is so strong, he does think there are opportunities in India and ASEAN countries over the long-term.

Another theme the investment advisers like is big tech. “It’s a long-term play; they are profitable and not expensive, profits are real and not just multiple expansion, and they have fortress balance sheets, high in cash and with little debt. It’s also possible to find investments trusts invested in big tech companies which are trading on 10-15% discounts,” said Darius.

James also says that US treasuries and UK gilts are becoming investible again now the 10-year bonds are offering yields of 3%. “The funds hold some US treasuries through an ETF,” he said. “It’s unhedged so they get US dollar exposure and in a severe risk-off market, they should do well.”

*Source: FE Fundinfo, total returns in sterling, to 6 September 2022.

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 investment advisers and do not constitute financial advice. Any reference to specific securities or funds is for illustration only and is not a recommendation to buy or sell.