How we are generating a high, regular income.

Chris Ainscough, co-manager of the Charles Stanley Monthly High Income Fund, explains the team’s investment approach.

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  1. Chris Ainscough

The aim of the Charles Stanley Monthly High Income Fund is to produce a high and sustainable income while seeking to preserve capital. It blends a variety of our best income ideas to provide a broad portfolio for income seekers. The latest yield is 4.7%, variable not guaranteed.

A flexible approach

We aim to build a resilient and varied portfolio. The fund invests at least 60% in government and corporate bonds (currently 65%), which means the income it pays is classed as interest rather than dividends. In addition we seek opportunities in equities as well as alternative areas such as preference shares or infrastructure.

We are fortunate that the flexibility of the fund allows us move around the capital structure in the same company. We can rotate from equity to debt or vice versa according to market conditions and what we think offers best value at the time.

Strength in numbers

Diversification is also very important to us. No single company represents a large percentage of the portfolio. The largest corporate positions represent around 2%. This means the value of the fund, and income from it, is not overly reliant on one area or single firm – essential in this uncertain and fast-changing world.

Small and nimble

We view the fund’s current size as ideal. Large enough for overall costs to be highly competitive but small enough for there to be several important advantages in terms of portfolio construction.

As well as positions in well-known shares and bonds we are able to harness alternative sources of yield such as convertible and preference shares, local authority bonds or investment trusts. Larger funds would not be able to secure meaningful positions in some of the niche areas we can access, and this can give us an edge.

Opportunities increasing

The number of attractive income opportunities has increased in recent months following market volatility. As prices fall yields rise, and there is greater prospect of increasing capital over the longer term.

There are of course risks. Further interest rate rises, especially in the US, would be negative for bonds, while an economic slowdown would adversely impact many corporate bonds, especially riskier higher yielding ones.

We ensure there is an eclectic mix of individual corporate and government bonds and that debt sustainability is a vital part in our investment process. The mix offers the fund some resilience during any ‘flight to quality’ in bond markets. Of course there is always volatility during times of stress, but we believe this allows us to ultimately benefit from our rigorous analysis and diversified approach.

Fund activity

Among the opportunities we have seen recently is Sainsbury Bank 6% 2027, which we believe is an under-researched and mispriced bond, and we also added to Pension Insurance Corporation through the PICORP 5.625% 2030 bond.

Meanwhile, in equities we recently took advantage of a price dip in Dairy Crest shares and subsequently banked a healthy profit on news of a potential takeover for the group. We also accumulated a position in Phoenix Group which continues to build it asset management business, the latest deal being a book from Aberdeen Standard Life. We admire the management team and the strong cash flow generation that supports high dividend pay outs.

We continue to seek out diversification through holdings such as Greencoat UK Wind, which we regularly buy into through placings. Its portfolio of green energy infrastructure is unlikely to be affected by global economic changes and provides a high yield, which has the prospect of increasing with inflation.

A ‘one stop shop’ for income

We don’t have a yield target as such, but aim to generate what we consider a high and sustainable level of yield from the portfolio in current market conditions. With monthly pay outs this fund could appeal to a wide variety of investors looking to achieve a good level of regular income as well as the potential for some growth in income and capital over time.

The fund is already popular with many customers of Charles Stanley, particularly those with pension drawdown who value the combination of a robust and regular income combined with relatively low volatility of capital.

Find out more about Charles Stanley Monthly High Income Fund here.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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