The Higher Income portfolio is now being dissolved. We review its performance.
Over the past four months, both the equity and bond markets have been on a tear. Thomas Becket, chief investment officer at Psigma and manager of the Higher Income portfolio, says: “It’s pretty obvious that the past six months have been a very easy time to be an investor.”
Over the four months between the end of February and the end of June, the portfolio returned 3.4%. Over the 12 months since its inception, it has yielded 3.5%. It is currently yielding 4.4%.
Becket says the reversal in the US Federal Reserve’s rates policy drove this performance. “All our strategies with income bias have benefited as yield has become even harder to find,” he says. “All assets have performed well, due to the collapse in various fixed-income yields. It has been very supportive.”
One of the best-performing funds has been Guinness Global Equity Income, which has achieved a total return of 10.3% since its purchase in February. Becket says the fund has benefited from its manager’s strong stock selection in an era of falling rates. He notes that low rates have boosted the value of much of the fund’s portfolio, as income stocks have become much more in vogue. But he emphasises that when it comes to selecting the right stocks in that environment, “the fund’s management has done an excellent job over the past few years and the past four months in particular”.
Also benefiting the from the current low-rate environment has been Legg Mason Rare Global Infrastructure. Becket says: “The fund has been a key beneficiary of the market dynamic of falling bond yields.” Falling yields have had investors piling into utilities. As a result, utilities have led the market in 2019. “That’s not something you usually expect to see in an equity bull market.”
However, he adds, the strong performance has come without any real improvement in the business dynamics of utilities. All the upside has been the result of investors fleeing low-yielding bonds. As a result, “we have reduced our position and taken some profits”.
Another surprise strong performer has been emerging market debt. Becket says: “Emerging markets did better in the fourth quarter of 2018 and outperformed developed ones. The sector has also done well in 2019 so far.”
That has been reflected in the relatively strong performance of Ashmore Emerging Market Total Return, particularly over the past four months. As the market has come to expect sustained low interest rates in developed economies, investors have started to look further afield for income-generating bonds.
Schroder US Income Maximiser, a recent addition to the portfolio, has also done well since its purchase at the end of February. The fund is a passive tracker with an income overlay using covered calls. “It’s still very hard to eke out income in the form of dividends in US equity markets. This allows us to have US equity exposure but generate some income,” says Becket. Since purchase, the fund has had the wind in its sails, thanks to the continued solid performance of US equities. Becket adds: “All markets have done well, but the US has been the yellow-jersey wearer over the past four months once again.”
In contrast, the UK-focused Schroder Income Maximiser fund has proved a disappointment. This fund, says Becket, has a value bias. “Its poor performance shows how difficult value has been as a strategy over the past four months and few years.” If the portfolio had been set to continue, he would have sold it.
A recent sell was Artemis Global Income. “We sold it after the last review because of its continued underperformance versus the index,” says Becket. A significant problem for the fund has been style drift. “We bought it originally as a core value proposition. But the fund’s manager isn’t keeping to the value strategy, and the thinking behind the fund seems to have become confused: there is too much focus on macro calls.”
The proceeds from the sale of Artemis Global Income were used to buy Schroder US Income Maximiser and Guinness Global Equity Income.
The portfolio is now winding up. As it does so, what does Becket make of its performance since he took over its management last summer?
He says: “Over the past 12 months, the portfolio has done everything we expected. It has achieved the income we needed while protecting on the downside and providing decent upside capture.” In the 12 months to the end of June, the portfolio’s total return has been 1.8%; the FTSE All-Share index over the same time period gained just 0.5%.
Becket adds that one drag on the portfolio’s performance has been Japanese equities. “Broadly, we have been overweight towards Japanese equities and this has been detrimental. Investors are ignoring Japan. It’s something investors should look to as a classic contrarian play.” However, he remains optimistic. He says: “It’s very cheap compared with other markets. Looking forward, we think we could make significant returns. It is under-owned and under-researched compared with, for example, the US market, which is quite expensive.”
Having started at launch in April 2017, the Higher Income portfolio closes with a total balance of £110,613.
2019 has been a strong run for income-seekers
Notes: *Portfolio manager change in August 2018 involved complete change of portfolio, so purchase date was 1 August 2018. **Total cash income since purchase £2,399. Source: Psigma Investment Management, as at 28 June 2019