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How to beat a low income world

Multi-managers are using different tactics to generate income in a low income environment, such as finding funds with more asset allocation flexibility and increasing exposure to infrastructure.

How to beat a low income world

Multi-managers are using different tactics to generate income in a low income environment, such as finding funds with more asset allocation flexibility and increasing exposure to infrastructure.

Multi-managers are finding different ways to tackle the problem of generating income in a low income environment. HSBC’s Julian York (pictured above), for example, has replaced a holding in a high-income generating fund with one that has more asset allocation flexibility. In contrast, Thames River’s Gary Potter and Rob Burdett have bought into high-yield infrastructure funds.

Finding flexibility

York, manager of the £190 million HSBC Income Fund of Funds Acc, has sold the Liontrust Income fund, run by James Inglis-Jones and Gary West, and replaced it with ’s Cazenove UK Equity Income.

‘We liked Hudson’s pragmatic approach,’ said York. ‘It’s definitely an income fund but will go into lower income areas if the top-down view justifies it. So in giving up the Liontrust fund, we’ve given up a high-income generator, but we’ve gained more top-down asset allocation flexibility in the UK equity income space.’

York recently received his first Citywire A rating, based on his risk-adjusted performance across two funds, Income Fund of Funds and HSBC ISF Cautious. He said the latter had been merged into HSBC bank’s retail offering in June because it had a similar remit.

 

He has holdings in the Invesco Perpetual Corporate Bond Acc fund, run by Paul Read and Paul Causer, and the M&G Corporate Bond A Inc fund run by Richard Woolnough.

‘Of late, M&G has performed more strongly than Invesco Perpetual,’ he said. ‘The most salient reason is M&G is anti-banks and financials, whereas Invesco is very positive. Invesco has underperformed as banks have done badly, but we don’t expect this to be a permanent state of affairs.’

The Income Fund of Funds has returned 16.32% over five years, compared to the benchmark LCI UK Balanced index’s 17.15%.

Trend spotting

 

Potter (above) and Burdett (below), managers of the Thames River Multi-Capital fund, are watching for trends that will fare well in turbulent markets and believe infrastructure currently fits the bill. Last month they bought International Public Partnerships, a listed infrastructure fund.

‘The trend at some point will be to add back to equities, but now we’re in a holding pattern in equities and quality income funds,’ said Potter.

The Thames River Distribution A Acc fund, also run by Potter and Burdett, holds the John Laing Infrastructure fund, Schroder Global Property Income Maximiser A Acc and MedicX Fund, a real estate fund that finances the construction of NHS doctors’ surgeries.

‘It is high-yield, quasi-government money, with longer leases and better rent review terms,’ said Potter. ‘Plus, there is no competition for tenants. It’s on the edge of modern healthcare policy of pushing more treatments towards GPs.’

Potter and Burdett also have holdings in the GCP Infrastructure Bond fund, which invests in bonds that support schools, hospitals, farms, pools and other buildings. ‘It’s high-quality, low-risk government-backed infrastructure,’ said Burdett. ‘This is steady, smooth, dependable stuff.’

Potter said infrastructure funds had done well during turbulent periods. ‘Last year, when we had this awful volatility in the stock markets, most of the infrastructure funds went up over that period,’ he said.

Thames River Distribution has returned 16.89% over five years, underperforming the LCI Mixed Asset benchmark, which has returned 36.08% over the same period.

Burdett said the fund focus was generating income for shareholders. ‘Our target portfolio yield is in the top 10% in the Mixed Investment 20%-60% shares sector,’ he said. ‘We’re in excess of that. The prospective yield is 6.5% on this fund.

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