These two funds should provide a decent level of income in return for relatively low fees.
Income is a key consideration for many investors. Talk to an income investor and most are targeting a return of between 4% and 6%. Yet at the same time, investors want protection from the downside. This all implies that the underlying asset classes should be relatively secure, be backed by real assets, boast lower volatility, and be diversified across different sectors and businesses. One way to achieve this diversification is to invest in a fund of funds, where an active manager pulls together a range of income investments –two such suggestions follow.
Steady and not too flashy
The BMO Managed Portfolio Trust (LSE: BMPI) is an investment trust that owns a portfolio of other trusts. It has, in effect, been split into two portions – one with its own share class aimed at generating capital growth, and the other at income. Manager Peter Hewitt has a steady, not-too-flashy style. His picks are fairly conservative, although he has in the past invested in slightly more adventurous ideas, such as social-housing expert Civitas. The top-ten holdings include a mix of slightly more adventurous options, such as Secure Income Reit, BB Healthcare Trust and BB Biotech, plus full-on adventurous (NB Private Equity), combined with the sensible (Law Debenture).
Performance has been fine. The income shares lost 8% in 2018, which was a tad disappointing, but they were up 15% in 2017, and 12.8% in 2016. Currently, the income shares trade at around the fund’s net asset value (NAV), with the dividend yield hovering at about 4.7%. That dividend has been growing for many years, from 4.6p in 2013 to 6.5p now. The annual management charge (AMC) is 0.65%.
If you combine the BMO fund with our second fund, the VT Gravis UK Infrastructure Income fund, you could generate an overall yield of more than 5%. This specialist infrastructure fund was launched in January 2016 and has so far done very well, with a total return of just under 22%. The fund pulled off a positive return in 2018, and returned 1.74% in the last six months of the year against losses of just over 10% for the MSCI UK benchmark.
The fund has (so far) also proved far less volatile than the main market (even less volatile than gilts), with a maximum drawdown of 7.91%. Meanwhile, it has delivered a net yield of 5.52%. These are good numbers, so it’s little surprise that the fund has grown sharply in size, and now has £316m in assets.
A first-rate portfolio
Solar funds make up about 23% of the fund, followed by healthcare infrastructure funds at 18%, and wind assets at 16%. Exposure to more traditional private-finance initiative (PFI) infrastructure is much lower (at 6%), which could limit political risk from investing in this ideologically-charged sector. The fund’s top holding is another Gravis fund, the listed GCP Infrastructure Investments, at just under 10%. I’ll admit that I’d prefer exposure to other Gravis funds to be lower, especially as another companion fund, GCP Asset Backed Income, is the sixth-biggest holding at 5%.
There are some direct equities (usually utilities) in the portfolio, comprising 8% of the fund, plus some bond holdings and cash. The dividend is paid quarterly, and has also been rising steadily – last year’s payout was 5.81p a unit. The AMC is 0.75%.
There are risks within the infrastructure sector, not least from rising interest rates and a potential political backlash. But so far, this fund has delivered on its promise. Putting it together with the BMO fund gives you a first-rate, income-focused equities portfolio, relatively cheaply.