Investec Diversified Income – fund update

Many investors want to generate consistent returns and a high income. This fund shares these objectives.

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  1. Rob Morgan

Securing a reliable income from investments has rarely been more challenging. Assets that offer a regular income are highly sought after but yields are relatively small by historic standards as interest rates around the world remain low. Yet there are still opportunities to produce a healthy income, especially for those prepared to be flexible about asset allocation. One way to do this is via a ‘multi-asset’ fund such as the Investec Diversified Income Fund.

This fund is managed by John Stopford and Jason Borbora-Sheen , who also draw upon the combined knowledge of the bond and equity teams at Investec. The aim is to produce a sustainably high income (presently it yields 4%, variable, not guaranteed) while providing some modest capital growth. The managers blend what they see as the most attractive opportunities in equities, high yield bonds, emerging market debt and, at times, listed property investments and infrastructure.

They seek to reduce risk by ensuring there is a diverse range of assets and have the ability to take measures to protect against falling markets. Historically, the fund has experienced less than half the volatility of UK equities and has strong a track record of minimising losses during episodes of market volatility, although like any investment it can fall as well as rise. In contrast to many funds, it delivered a positive return in 2018, an unusally negative year across most asset classes.

The approach contrasts with a typical multi-asset fund which might rely on asset allocation and decision making based on the macro-economic picture to generate performance. Instead, Mr Stopford and Mr Jason Borbora-Sheen prioritise individual stock selection, looking for securities with an attractive yield and displaying characteristics which suggest their income streams are sustainable and that they offer good value. The fund is concentrated for its type; presently there are 45 equities and around 25 bond issuers represented, which means each position typically has a significant influence on returns, though this approach can increase risk.

The resultant portfolio provides an ‘engine’ of strong long term returns from shares and bonds with resilient yields and the potential for capital stability or appreciation.  The managers ensure diversification of the portfolio by owning a mix based on their behaviours, warning that  traditional diversification ideas that rely on whether an asset is a bond or an equity can prove naïve. Notably, correlation between fixed income and equities is variable and has sometimes been positive – in other words they can move up and down in tandem, thus not really providing any diversification benefits.

Finally, they ‘hedge’ the portfolio when they believe the levels of risk in the market appears to be dangerous. This tends to involve derivatives such as futures or options, which reduces potential upside when deployed but has the important effect of dampening down the portfolio’s volatility and protecting against capital loss.

The desire to balance returns with volatility, and being defensive when it matters, leads to a dynamic approach that has the potential to capture market upside but cap downside in times of stress.  For instance, at certain points during December 2018 more than two thirds of the fund’s equity exposure was hedged, which helped the fund hold up comparatively well against the market and its peers during that difficult period. Also contributing to strong relative returns over the year were positions in Australian government bonds and selected opportunities in emerging market debt.

Turning to the year ahead, Mr Stopford explains the portfolio is finely balanced. Exposure to equities remains intact but is offset to a degree by derivatives positions to defend against market falls. In bonds the team has grown cautious on corporate debt, especially towards the higher yielding end of the market, preferring to own government bonds, including higher risk emerging markets, albeit hedging much of the sensitivity to interest rate changes as well as currency risk. He emphasises that the fund is not reliant on government bonds for the purposes of hedging against equity market falls.

Our view

We continue to believe this is a well-managed income fund overseen by a committed team. The combination of strong returns coupled with relatively low volatility has been impressive, though past performance is not a indication of future returns.  We believe it is worth considering as a core component of an income portfolio and remains part of our Foundation Fundlist of preferred funds across the major sectors.

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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