Purposeful Portfolio: Regular Income - Rich pickings for income seekers

Our Regular Income portfolio has collected £4,393 in dividends since its April launch, a yield of almost 4.4 per cent. With many UK equity income funds struggling to meet the Investment Association sector requirement to match the yield of the FTSE All-Share index – currently 3.6 per cent – James Brumwell is pleased with his portfolio’s progress 

Top of the Regular Income table are the National Westminster preference shares, which have produced a total return of an impressive 25.3 per cent since inception. Investors have been on a quest for income-paying options for a number of years now, and the Bank of England’s decision to hike interest rates in November, along with rising inflation, has only intensified this. 

The preference shares, as well as paying a meaty yield, have the added attraction of being ringfenced. This means they can’t be hurt by any legacy issues, such as fines, which could impact NatWest bank. ‘This is the sort of investment which might have slipped under the radar in the past but is now being tipped more frequently,’ says Brumwell. The shares have the second-highest yield in the portfolio at 6.4 per cent. 

It’s a similar story with the General Accident preference shares, which have paid total income of £422 since the portfolio launched. The shares currently yield 5.8 per cent and have been among the top performers of the group, with a total return of 16.7 per cent. ‘People are casting around for secure income, and if you wait five years for gilts to look attractive again you will have missed out on a lot of income from investments such as this in the meantime,’ Brumwell comments. 

These are not the only two holdings in the group to have produced double-digit total returns over the past nine months. JP Morgan Global Growth & Income (JPGI), Scottish American (SCAM), Standard Life Equity Income (SLET) and Finsbury Growth and Income (FGI) have all delivered returns of more than 11 per cent. Meanwhile, Invesco Perpetual Enhanced Income (IPE) and Merchants investment trust (MRCH) have both delivered just shy of 9 per cent, as well as some of the strongest yields in the portfolio at 6.3 per cent and 5.1 per cent respectively. 

Scottish Mortgage (SMT) is the second top performer of the lot, with a total return of 22.6 per cent. The trust – not a typical income investment choice – was included for its ability to add some capital growth to the portfolio. ‘It’s easy to look back and think it’s a shame we only put a small percentage of our assets in the fund, as it has done so well, but then you have to remember the aim of the portfolio is regular income and this trust only yields 0.8 per cent,’ says Brumwell. 

Just two holdings within the portfolio are in the red. Income investors may find it surprising that the infrastructure and commercial property holdings – sectors which have been darlings of the income world in recent years – have been the weakest of the group. 

HICL Infrastructure (HICL) owns assets such as student accommodation, hospitals and major roads in the UK and Europe. A hike in the base rate of interest has seen such fixed income investments ease off marginally, as the income they generate looks slightly less appealing relative to the alternatives. But while it is down 3 per cent since inception, the trust still has a healthy yield, and Brumwell likes the fact that its dividend is covered more than 1.5 times. ‘We’re relying on that steady income stream, and it does still trade at a premium,’ he adds. 

F&C Commercial Property (FCPT) is one possible contender for replacement – the UK-focused trust has suffered from the uncertainty around the commercial property market as Brexit negotiations play out. It is down 3 per cent, where rivals with less of a UK focus have produced positive returns, but Brumwell thinks its yield is stronger than peers such as TR Property. He will be keeping an eye on the performances of these two between now and the next review. 

Preservation game

Yet these are not the investments that have most disappointed Brumwell. Despite the fact that it turned in a positive performance over the period, he has been least impressed by RIT Capital Partners (RCP). ‘The trust’s mantra is capital preservation, and historically it has outperformed when markets fall, so it could do well if we see the stock market tumble this year,’ he suggests.   

Interest rates and inflation will be the two things to watch over the coming months, although Brumwell thinks worries about the latter are overdone. ‘It’s a common concern among investors at the moment. It’s affecting a few areas, but I don’t think it seems to be filtering through to the economy as a whole,’ he says. 

Instead, he thinks the strength of the pound will dictate much of market performance, and indeed will determine what happens in both bond and equity markets. But Brumwell’s message is that investors should not miss out on returns because of something that may or may not happen in the future – those who avoided bonds for fears of rates rising over recent years, for example, would have sacrificed some hefty returns. ‘As long you have your money spread across a range of investments and you can react as things change, you should be OK,’ he argues.   

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Name Purch price
(£)
Quant bought Value
at
incep (£)
Current value (£) Change since last update (%) Change since incept (%) Current yield (%) Inc'
rec'vd since incept
(£)
Total return since incep
(%)
Invesco Perpetual Enhanced
Income
79 9000 7,110 £7,422 4.2 4.2 6.3 £450 9
CQS New City High Yield Fund 62 11500 7,159 £7,159 1.5 -0.1 7.1 £506 5.4
HICL
Infrastructure
169 4250 7,183 £6,724 -0.2 -6.5 4.6 £327 3.1
Foreign
& Colonial Commercial Property
145 5000 7,225 £6,795 -8.1 -6.1 4.2 £300 -3
General Accident 8.875%
Cumulative
152 4750 7,196 £8,241 4.9 13.8 5.8 £422 16.7
National West-minster 9%
Series A Non Cum
140 5150 7,210 £8,858 13.1 22.1 6.4 £464 25.3
JPMorgan
Global Growth & Inc
292 2400 7,008.00 £7,926 4.5 12.4 3.6 £252 14.2
Murray Int'nal 1,215 575 6,986.25 £7,291 -1.5 3.7 4 £282 6.7
Scottish American 334 2100 7,014.00 £7,728 1.8 9.5 3.2 £231 11.9
City of London 417 1700 7,080.50 £7,463 3.5 4.7 4 £284 7.8
Merchants 472 1500 7,072.50 £7,470 3.2 5.0 5.2 £367 8.8
Standard
Life Equity Income
411 1700 6,987.00 £8,050 3.0 14.5 4.1 £290 16.4
Finsbury Growth &
Income
694 700 4,858.00 £5,425 3.6 10.9 2..0 £99 12.9
Scottish Mortgage 366 1300 4,758.00 £4,905 1.6 3.9 1.7 £80 5.6
RIT Capital Partners 1,875 250 4,687.50 £5,837 4.0 21.8 0.8 £39 22.6
£99,534 £107,293 7.6 4.4 £4,393
Notes: Inception date of porfolio was 1 April 2017. Last update as at 1 September, published in the October issue. Net value includes £10 broker fee plus 0.5% stamp duty where necessary: IPE, NCYF, HICL and FCPT do not incur stamp duty. Source: James Brumwell, as at Jan 1 2018

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