Where multi-asset fund managers are finding income, June 2020

With the interest on cash and government bonds close to zero, some open-ended property funds still suspended (as valuers have been unable to get out and about during lockdown) and dividends being cut left, right and centre, income investors could be forgiven for thinking that bonds are the only asset left in town.

But is it? We asked five multi-asset income managers where they are finding income – starting with our own VT Chelsea Managed Monthly Income fund.

VT Chelsea Managed Monthly Income (historic yield: 5%)

“Clearly, with a swathe of dividend cuts globally, it is unlikely we’ll be able to grow the dividend next year, but we are working very hard to maintain - or at least be very close to - the current level in the coming months,” commented Juliet Schooling Latter, investment advisor to the fund. “The beauty of a multi-asset fund such as this is that it doesn’t rely solely on one asset class or geography for its income.

“We’ve had particular success investing in a number of specialist income-producing investment trusts – including those investing in specialist property, infrastructure and renewable energy - and being able to access institutional placings of these vehicles, which are not open to retail investors. “Individual fund selection has also added value, with M&G Emerging Markets Bond, Man GLG Income and Montanaro UK Income notable contributors.”

Premier Multi-Asset Monthly Income (historic yield 5.8%)

Premier Multi-Asset Monthly Income fund’s two largest asset allocations are to UK equity income funds and specialist bonds (both 28%*). It also has 10% in investment grade and high yield bond funds and 7.7% in emerging market bonds. The other third of the fund is spread between overseas equity income funds, property REITs and convertibles*. David has warned that, as a result of the economic impact of the coronavirus, the dividend payments by the fund may be lower over the next twelve months.

Lead manager David Hambidge said: “Having added a substantial amount of credit into the fund at the lows in the market in late March, we continued to increased exposure here in April, which has benefited performance. Emerging market debt also performed strongly. Japanese, European and global infrastructure equity holdings (which we added to in May) have also helped.”

BMO MM Navigator Distribution (historic yield 4.8%)

This multi-asset, multi-manager fund has 37.5% in fixed income (including a number of strategic and high yield bonds), 19.3% in UK equities, 10.4% in specialist assets and the rest in overseas equities**. It has also invested in a global equity income fund that uses call-options to enhance its yield.

Meeting managers is central to the team’s process, and they have developed a unique skill in finding specialist funds from boutique managers with a focus on sustainable high yield. The team spends as much time developing or researching new ideas as it does on the maintenance research.

Jupiter Merlin Income (historic yield 2.7%)

John Chatfeild-Roberts, co-manager of the fund, believes that total UK dividends could be cut by some 50-55%. “We think it will be a permanent cut as companies rebase dividends and increase dividend cover,” he said. “After the Great Depression it took until 1957 (25 years) for dividends to return to pre-crisis levels in inflation-adjusted terms. We could have the same wait again. Mindsets need to change, and I think ‘sustainable’ dividends will be more important than high dividends going forward.”

The fund’s largest allocation is to fixed income (37%**) with a preference for strategic and specialist bond funds. Although there is still 16%** in UK equity funds, the larger allocation is to overseas equity income (21.5%**). The team are also finding opportunities in specialist property and gold.

M&G Episode Income (historic yield 2.76%)

M&G Episode Income has around 50%** in equities at the moment, but just 3%** of this is in the UK. Instead, the manager prefers European equities (11.8%**) and Japanese equities (13.4%**). He also has 34%** in government bonds - mainly from the US and emerging markets - 7.6%** in corporate bonds (5% of which are high yield) and 3.5% in property**.

Commenting on his fixed income holdings, manager Steven Andrew said: “US government bonds are currently offering a yield of 1.5% and that's something that isn't seen in any other developed government bond market. So, we're still very comfortable owning a large amount of US 30 year debt. In Emerging market bonds there are four main holdings: Brazil, Columbia, South Africa, and Mexico. They're there more as a strategic contributor to the income side of the portfolio. They have yields from about 3.5% to 10%. We also added a bit in US high yield about a month or so ago when the markets were in a phase of distress.”

*Source: Fund factsheet, 30 April 2020
**Source: Fund factsheet, 31 May 2020

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 managers and do not constitute financial advice.


Published on 29/06/2020