Answering the income dilemma
“Investors are likely to find the search for sustainable income even more challenging in a...
Equities around the world have enjoyed an incredibly strong bounce back since the Covid-19 crash, thanks to vast government stimulus and the swift roll-out of a vaccine. But with all markets – from bonds to equities and real estate to classic cars – now expensive, and central banks starting to withdraw the stimulus, uncertainty has set in.
Concerns are mounting about falling UK growth, a Chinese property bubble, and inflation, which is threatening to become more persistent than first thought. As a result, investors may be thinking now is the time to position their investment portfolios more defensively.
The tricky thing is, it’s very hard to invest defensively at the moment – there are very few hiding places.
The traditional defensive assets – government bonds – have very little yield or even negative yields, so are risky themselves.
One option could be the targeted absolute return sector, where you can find a mix of different types of funds. The problem is, many are quite expensive in terms of charges and some just haven’t lived up to their promises.
There are one or two good ones we like though. One is the Artemis Target Return Bond fund managed by Stephen Snowden, and the other is TwentyFour Absolute Return Credit. Critically, both these funds are cheap relative to other targeted absolute return funds and both have tight risk controls.
Artemis Target Return Bond has the flexibility to short bonds as well as go long, allowing the team to potentially make money when bond prices fall as well as rise. TwentyFour Absolute Return Credit is ‘long only’ but invests in short duration bonds. This means the bonds are less sensitive to big moves in interest rates or the economy, as the bonds mature soon.
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Another option which gives you some defense but also the potential for some returns would be mixed asset funds. These funds can combine a range of different assets and the broad mix of different investments can help to reduce risk. They will have exposure to traditional asset classes like bonds and equities, but also areas such as renewable energy, music royalties, care homes, logistics, warehouses and many more.
Close Managed Income, for example, has just under 15% invested in ‘alternatives’ at the moment*. BMO MM Navigator Distribution also has 15% in specialist non-equity funds and non-correlated assets*, while VT Momentum Diversified Income has a much larger 33% invested in specialist and defensive assets*.
Vincent Roper, manager of TB Wise Multi-Asset Growth fund also outlined six tactical allocation strategies for us that can help multi-asset investors safely plot a course through the post-recovery period.
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The final option is to trust the equity managers. We have seen some interesting moves within equity funds of late, where managers have moved large weights to defensive-type stocks such as utilities and consumer staples.
Those businesses that have survived the pandemic may also be able to take market share and give themselves a more positive outlook – the sudden consolidation in the energy sector is an example of this.
Funds that are exposed to some of these areas include Fidelity Global Dividend – which has 16% in consumer staples stocks including its largest holding, Unilever*; JOHCM Global Opportunities, which often holds high cash levels for defensive reasons (currently 9%) and has 21% in utilities and 11% in consumer staples; and Morgan Stanley Global Brands, which currently has almost a third of the portfolio invested in consumer staples companies*.
*Source: fund factsheet, 31 August 2021