Purposeful Portfolio: Higher Income - Looking for lift

Although the yield was off-target, the portfolio has still made total returns of

Our Higher Income portfolio targets a 5 per cent yield and is currently missing the mark. But Gary Millward, financial consultant at Alan Steel Asset Management, who is running the portfolio for us, says this is intentional.

‘I would deem 5 per cent to be a high target in the current climate. To achieve a yield above 4 per cent, investors need to allocate to much riskier areas of the market such as emerging market debt and high-yield credit, or to have exposure to complex investment strategies,’ he explains.

Millward says that unless investors are willing to stomach a high level of volatility, which could see the value of their capital swing up and down, they would do better not to stretch for a greater yield. High volatility in a portfolio is a particular problem for anyone who may need shorter-term access to their money.

Respectable yield

Our portfolio is currently yielding just shy of 3.3 per cent. Since its launch on 1 April investors would have collected a tidy £1,659.91 in income and seen a total return on their investments of 7.2 per cent. The capital growth of the portfolio, up 5.5 per cent since launch, can be used to draw additional income. ‘It’s a more sensible approach at the moment,’ says Millward.

The funds chosen for the portfolio should benefit from inflation in developed markets and from central bank interest rate rises, he says; with the UK having just experienced its first rate rise in almost a decade and the US likely to hike rates further, this strategy will now be put to the test.

Millward is making a change to better deal with the outlook, however. The Neptune US Income fund, which is up just 1.57 per cent since inception and has the lowest yield in the group, is being ousted because it does not have a currency hedge. Millward says the performance of the fund, which invests in dollars, could be held back if the greenback weakens against sterling.

In its place he will bring in the Invesco Perpetual European Equity Income fund – another choice with no currency hedge (it invests in euros, so any change in the exchange rate between the euro and sterling could impact 

Standout performers

The standout performers of the portfolio so far are Chelverton Small Companies Dividend Trust and TR Property, which have delivered hefty returns of 16.67 per cent and 17.67 per cent respectively. Some 13.8 per cent of the Chelverton fund portfolio is invested in financial firms, which have started to come back into favour in recent months as investors widely expect interest rate hikes to benefit the bottom line of these businesses.

Meanwhile, TR Property has benefited from an improving outlook for the UK commercial property market, though this could see a setback if investors think that rising interest rates will affect tenant businesses’ prospects, or that Brexit negotiations could dampen demand. With such strong performance so far, however, Millward says he may look to pocket some profit from these funds at the next review.

Lagging behind in the portfolio is Rathbone Income, which has returned just 0.34 per cent since inception. Though the fund has one of the highest yields in the portfolio at 3.74 per cent, its performance has been hurt by its investment in sub-prime lender Provident Financial, whose share price plunged over the summer after a profit warning. Carl Stick, who manages the fund, has now sold out of the position completely. Millward says: ‘I’m keeping the fund in the portfolio because it has a good blend of investments and complements other holdings such as R&M UK Equity.’

With stock markets continuing to set new record highs on a regular basis, Millward is pragmatic about the effect of any profit warnings on share prices and fund performance. ‘I expect the market to overreact to any sort of bad news, and expensive bond proxy stocks will be the area of the market which will be hurt the most,’ he says. As a result, one of the aims of the portfolio is to ensure that there is low correlation between the holdings, so they are not all affected simultaneously by any market moves.

Also among the poorest performers is Artemis Global Income, which has returned just 1.36 per cent since the portfolio was launched. Manager Jacob de Tusch-Lec says weaker tourism amid terrorism fears held back investments such as Spanish theme park operator Parque Reunidos, with lower visitor numbers adversely impacting its peak trading season over the summer. There could be more volatility to come in Europe after Catalan’s bid for independence. But while the growth of the fund has been low, it still has a reasonable yield of 3.53 per cent.

Millward has not been overly impressed with the Axa Distribution fund either, but says he will hold on to it for now because there is little bond exposure elsewhere in the portfolio. But he warns that the bond market could ‘experience some pain’ over the coming months as central banks eye higher interest rates and start to unwind their quantitative easing programmes. The fund has so far returned 2.27 per cent and yields 2.54 per cent. While investors seeking a higher overall yield may be disappointed with the performance of our Higher Income portfolio, Millward says he is pleased with progress. Our next review could see some profit-taking from the stronger performers and a potential reshuffle, depending on the market reaction to rate hikes. 

SWAPPING OUT US INCOME FUND FOR EUROPEAN EQUITY INCOME COUNTERPART
Name Sector Mthly
div paid
Purch price (p) No.
purch'd
Value at start (£) Currnt value (£) chng since start (%) Cur-rent yield (%) Inc rec'd since Aug (£) Total inc rec'd (£)
Artemis Global Inc GEI Feb, Aug 101 9,937 10,036

10,136

1.36 3.53 266 266

Axa Distru Mixed Inv 20-60% shares Jan, Apr, Oct, July 132 11,363 14,999 15,341 2.27 2.54 98 98
Chelverton Small Co Div Trust UK
eq inc
Jan, Apr, Oct, July 228 4,385 9,998 11,667
16.67 3.05 83 269
LM IF Clear
Bridge
GEI
Global equity income Jan, Apr, Oct, July 142 7,047 10,007 10,289 2.89 3.7 74 74
Miton Cautious Monthly Income Mixed Inv 20-60% shares Mthly 132 11,367 15,004 15,688 4.58 3.84 185 291
Neptune US Income* North Am-erican Jan, Apr, Oct, July 165 6045 9,974 10,157 1.57 2.19 53 112
R&M UK Equity Inc UK equity income April, Oct 525 1,903 9,991 10,469
4.69 3.97 0 218
Rathbone Income UK all companies April Oct 986 1,014 9,998 10,034 0.34 3.74 0 128

Thames River Capital (UK) TR Property Inv
Trust
IT proper
ty - secu-rities
June, Dec 314 3,188 10,010

11,767 17.67 2.85 0 204

Invesco Perpetual European
Equity Income **
Europe ex UK June, Dec 398 2,549 10,157
10,157

n/a 2.99 n/a -
100,017 105,546 5.55 3.27 757 1,659

Total return 7.2% (inc income received) 107,207
Notes:Start date of the portfolio is 1 April. * Sold at this review. ** Bought at this review. Source: Alan Steel Asset Management. GEI= Global equity income
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