Purposeful Portfolios: Higher Income - the nine funds chosen

With just nine holdings, our higher income portfolio is much more concentrated than our other three purposeful portfolios. All were launched at the start of April.

Gary Millward, financial consultant at Alan Steel Asset Management, has been tasked with building a portfolio to generate an income of 5 per cent. Millward aims to achieve this goal through dividend growth as opposed to targeting a high dividend yield, reflected by the current portfolio yield, which is just over 3 per cent. At a later stage Millward may have to resort to dipping into capital in order to achieve the target.

On valuation grounds Millward is cautious on the outlook for global stock markets in general and thinks will be some pain to come over the next 12 months.

In addition, Millward is concerned that some investors are overpaying for so-called bond proxy stocks as they try to chase yield.

In the meantime, he is focusing on funds with a flexible, multi-asset approach, where the manager has the freedom to build in some areas of defence. This is the area where the largest proportion of the portfolio is, with Axa Distribution and Miton Cautious Monthly Income accounting for almost 30 per cent of the portfolio.

He says: ‘I like that they can buy cyclical assets such as precious metals and commodities, which don’t tend to be so correlated to the stock market, as that provides some downside protection for the portfolio.’

But Axa Distribution may not still be in the portfolio by the time we reach the next review. After 33 years at the helm, Jim Stride is stepping down from the fund to retire. Jamie Forbes Wilson and Matthew Huddart, the co-managers who have been working on the fund for the past 18 months, will take over its running, but Millward is unsure whether he will be sticking around to see how they do.

He says: ‘I am a buy and hold investor, I don’t like selling funds, but this is a concern. It goes against my mantra of sticking with your position, but when a manager leaves it is one of the few times you really need to re-evaluate your holding. However, the fund has been strong over the past year, so that could be a sign of things to come.’

Yet the fund has been one of the weaker constituents of this portfolio since its 1 April inception, down 0.75 per cent in its first three months.

Five funds of the nine in the portfolio are in negative territory. But Millard is not unduly concerned, pointing out that investment is a marathon not a sprint.

Click the table below to view a larger version

Early winners and losers

Bottom of the pile is Artemis Global Income; the fund is a top-quartile performer over a 12-month period but its value approach to investing has hurt it in recent months. This fund brings European exposure to the portfolio, with about 35 per cent of its assets invested in the region. Millward says he may increase his exposure to the continent over the coming months. ‘Sentiment towards Europe has picked up and share prices are attractive,’ he says.

The star performer in the group so far is TR Property, which has returned a stonking 8.5 per cent over the first three months. Millward says that while many investors were put off the property sector after last year’s post-Brexit fund suspensions, he thought the sell-off  ‘was a bit of a knee-jerk reaction’. TR Property has 36 per cent of its assets across France and Germany, and Millward likes that it is tapping into the rising popularity on the continent of shopping malls, which offer an entire day out with cinemas and restaurants as well as shops.

R&M UK Equity Income has the highest yield of the group at 4 per cent. Some 13 per cent of the fund’s assets are in oil and gas companies with its two largest holdings being BP and Royal Dutch Shell. Companies in the sector have performed particularly well over the past year as the weakness of the pound has boosted overseas profits and the oil price has picked up slightly.

Active pick for US market

While many investors choose to use a tracker when they put money into the US stock market, Millward has opted for Neptune US Income for his exposure to the region. He thinks stocks in the country still have further to climb despite reaching all-time highs, but wants an active manager to dig out opportunities.

In the smaller companies space he has chosen the Chelverton Small Companies Dividend Trust for its nimbleness. The investment has already made a gain for the portfolio as it has moved from a discount to a premium, contributing to a share price return of 7.9 per cent. The trust has one of the lower yields in the portfolio, at 2.5 per cent. It has 17 per cent of its assets in financials and 12 per cent in construction companies. Millward says: ‘The manager has been at the helm since the trust launched in 1999 and he is someone I have complete confidence in.’

There have been mixed results so far for the higher income portfolio, with a total return of 2.4 per cent and a dividend yield just over of 3 per cent. The value style bias of many of the funds has held back performance as the approach has been out of favour in recent months, but Millward is expecting it to flourish again in the future.

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