Purposeful Portfolios - Higher Income: a few funds hit high

The higher-income portfolio has benefited from some outstanding performance, but mixed results overall have left its manager feeling rather cautious.

Our higher-income portfolio has been a mixed bag over the past four months, but one holding has stolen the show. The TR Property investment trust has returned an impressive 15 per cent since our last update and is now up by more than a third since the launch of the port­folio. This investment trust, founded in 1905, holds a mixture of property company shares and bricks and mortar assets across Europe, with 17 per cent of its assets in France, 16 per cent in the UK and 9 per cent in Germany.

Cautious mood

Healthy company results have helped drive the performance of the trust, which yields 2.9 per cent, despite volatility in Italy and concerns about the UK property market as Brexit plays out. Perhaps it is these clouds that have kept the trust at a modest premium of 0.8 per cent, despite its strong returns.

Gary Millward, a financial consultant at Alan Steel Asset Management, who runs our portfolio, says it has been an extremely useful diversifier, along with the other property hold­ing in the group, M&G Property Portfolio.

His portfolio has now delivered a total return of 8.7 per cent since launch, while more than £4,700 has been paid out in dividends since we started. That doesn’t quite meet our 5 per cent income target, but Millward is cautious at the moment, and he thinks investors would do better to take less risk and instead draw down some capital growth to boost their income.

Since our previous update, the portfolio has returned 2.9 per cent and paid out £1,425 in income. Millward has been particularly happy with Artemis Global Income and River & Mercantile UK Equity Income, which have come back strongly after a slow start. He says: ‘Both managers have maintained a disciplined value approach to investing and have now been rewarded for avoiding challenged sectors.’

Top performer

Artemis Global Income is the top performer in its peer group in the year to date; and a top-quartile performer over the past year. Manager Jacob de Tusch-Lec takes a contrarian approach, investing in Italian telecoms such as Infrastrutture Wireless Italiane, and industrial firms such Japanese company Tokai Carbon and Chinese cement business Anhui Conch.

Chelverton Small Companies Dividend Trust announced plans in June to change its name to Chelverton UK Dividend Trust, which may be more appropriate, given that almost a third of its holdings are in companies worth £500 million or more. Millward is happy with the change, as managers David Taylor and David Horner are ‘equally skilled across the market cap spectrum’.

The trust was initially one of the stronger performers, but returns eased off amid the recent market sell-off. Nevertheless, Millward still thinks its 3.4 per cent yield warrants its place in the portfolio and hopes it will benefit as sentiment towards the UK improves.

Three holdings have fallen in value since our previous review, and the same three are down since inception. Invesco Perpetual European Equity Income has been the biggest disappointment. It was bought at a time when European stocks looked cheap compared with their US counterparts, but Millward says the latter ‘have continued to grind higher, while sentiment towards European stocks has turned’. However, he says he is willing to stick with the fund for diversification and because manager Stephanie Butcher, who has run the fund since 2010, has outperformed her peers in four of those years.

Legg Mason ClearBridge Global Equity Income has been held back by a lack of exposure to soaring technology stocks. Investments in consumer stocks and real estate have also weighed on returns, and the fund is down 5.5 per cent since our previous review.

Miton Monthly Cautious Income has ‘delivered what was required’. The defensive nature of the fund, which has 37 per cent of its assets in bonds, means it has held up well as the stock market has grown more volatile. It has the highest yield in the portfolio, at just over 4 per cent.

Staying firm

In something of a controversial move, at the previous review Woodford Equity Income was added to the portfolio. In its first four months in the line-up the fund delivered a return of 1.35 per cent. However, it has been under fi re recently and has been downgraded or removed from several brokers’ best-buy lists.

Millward says: ‘The fund continues to lag the UK equity income sector – which has returned around 6 per cent in the period – but I’m happy to allow Woodford to recover, given his track record, the portfolio’s composition and the attractive valuation.’

He thinks the Woodford, Invesco and Legg Mason funds will all be among the strongest performers for those willing to stick with them.

Millward is standing by his cautious approach. Stock markets are becoming more volatile and there are headwinds such as interest rate hikes and the reversal of quantitative easing still to navigate, not to mention Brexit. All these could be detrimental for bonds and bond proxy stocks.

Millward says: ‘Managing an income portfolio has rarely been more challenging. High-yield stocks offer little cause for confidence and bonds seem certain to disappoint. It has curbed my enthusiasm for risk, so we stick with modest yields and the use of capital growth to provide extra income while we navigate the challenges ahead.’

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