Each week, a professional investor tells us where he'd put his money. This week: Chris Ainscough, FP Matterley Regular High Income Fund.
Our high-income fund aims to preserve capital and generate a sustainable income for investors. Income-seekers tend to be risk-averse, so when I'm building the portfolio, safety is my priority. This can be done via the usual route of diversification (the more holdings in a portfolio, the lower the exposure to problems with individual holdings "idiosyncratic risk").
But it's also important to balance holdings of high-grade (lower-risk) bonds with high-yield (higher-risk) bonds, and shorter-duration (loans that mature relatively soon) corporate debt with longer-duration government bonds. This strategy allows an investor to choose the type of risk (ie, credit risk) they want to take, while protecting themselves from movements in the underlying government yield curve, which has been extremely volatile over the last few months.
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In other words, you can hedge against changes in the wider interest-rate backdrop by holding the right mixture of bonds. Throw in a selection of equities that offer the potential for capital appreciation as well as income, and you have a robust, diversified and high-yielding portfolio.
For private investors there are three main way to access fixed-income markets: through bond funds, government bonds and the LSE retail bond market. The retail bond market has seen a range of issuers since its creation in 2010, with the majority being smaller financial and property institutions. One of my favourite exceptions to this rule is Burford Capital, the litigation-finance fund. It selectively funds corporate litigation cases and takes a share of the awards for those that succeed.
It has a very good track record. Burford has tapped the retail market twice now, though my preferred issue is the Burford 6.5% 2022 (BUR1) bond, which offers investors a 5.25% yield to maturity at current levels. Investors should, however, be aware of the liquidity constraints in this market, with a lot of the issued bonds being tightly held by private client investors.
Volatility is perceived as negative for most businesses. However, IG Group (LSE: IGG), which offers stockbroking and financial-derivatives trading services, thrives in volatile markets when customers are actively trading. With an expanding global presence, new products and an estimated dividend yield of 4.0%, these shares offer investors attractive exposure to non-bank financials. The share price can be quite volatile, so be sure to pick your entry point carefully.
In uncertain times, tobacco giant British American Tobacco (LSE: BATS) provides a defensive core position for a UK equity allocation. Both the equity and the debt (which is available in sizes small enough for retail investors) offer investors a safe haven during testing market conditions. Despite being one of the market leaders, it is still growing its market share. As a result of recent weakness in sterling, there is some potential for foreign-exchange movements to result in higher earnings.
Chris Ainscough, FP Matterley Regular High Income Fund.
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