Like most human activities, investment is driven by fashion. Take income funds. In the heady era of financial engineering, companies with solid balance sheets and reliable dividends were like Sta Prest slacks on a rack of skinny jeans – dowdy and unexciting. That changed with the financial crisis. Quantative easing and cuts in interest rates meant cash parked at the bank earned virtually nothing, making any reliable source of income look attractive. The stockmarket’s largest, most trusted dividend payers were suddenly back in fashion and their share prices soared.
Like many income strategies, the Artemis Monthly Distribution Fund has been a beneficiary of this hunt for yield. Yet while the hunt for income has boosted total returns, it now poses a challenge for income-seeking investors.
We tread a tightrope. On one side, trying to earn our investors a lot more income would involve taking unacceptable risks. On the other, avoiding risk altogether would reduce the monthly distribution which is our raison d’être. In fixed income, government bonds are safe – supposedly. But yields are low and a spell of volatility earlier this year suggested they may be more vulnerable than once thought. Meanwhile, years of unorthodox monetary policy have pushed some investors out of bond markets, where they were earning too little, and into stocks. Particularly in the US, the fad has been for huge companies with respectable dividend payments and the reliable earnings to support them. But this fashionability has undermined one of their attractions. The names that tend to feature in the top-10 holdings of so many income funds (the ‘usual suspects’) have become very expensive. Once ‘safe havens’, they are now vulnerable to investors selling out en masse should economic growth or inflation prove stronger than expected.
Whatever the challenges, the demand for income will continue – and grow, indeed – if only because of demographics: according to a UN report, by 2050 one in every three people in what it defines as ‘more developed’ economies will be over 60 and presumably in need of some kind of pension. It is unlikely that simply buying and holding a selection of government bonds and the most popular equities with regular income streams, will produce acceptable returns. Yields are unimpressive and some of these investments may appear very ‘last season’ once interest rates start to rise.
So, while the world waits for them to do so, we believe an active approach like ours – taking appropriate risks and being adequately compensated – can help. One ‘risk’ in our portfolio is having a large investment in bonds with a higher yield because of their lower credit rating – particularly in Europe. These should benefit from ongoing money printing in the eurozone. And, of course, they provide a useful income.
In equities, being active means being prepared to look beyond classic income stocks to unfashionable regions. For instance, growth in Europe may be less impressive than in the US – but expectations are so low that any growth at all comes as a pleasant, and well-rewarded, surprise. Today, our top 10 equity holdings include a Portuguese postal operator, a Basque telecoms company and a Danish shipping company. Clearly, these aren’t the ‘usual suspects’.
In the years ahead, it seems likely that income funds will remain in vogue. But the places where yield is found are unlikely to be the same. This means tailoring portfolios as economic, market and monetary conditions evolve.
To ensure you understand whether this fund is suitable for you, please read the Key Investor Information Document which provides more information about the fund.
The value of any investment, and any income from it, can rise and fall with movements in stockmarkets, currencies and interest rates. These can move irrationally and can be affected unpredictably by diverse factors, including political and economic events. This could mean that you won’t get back the amount you originally invested.
The fund may invest in emerging markets, which can involve greater risk than investing in developed markets. In particular, more volatility (sharper rises and falls in unit/share prices) can be expected. The fund may use derivatives (financial instruments whose value is linked to the expected price movements of an underlying asset) for investment purposes, including taking long and short positions, and may use borrowing from time to time. It may also invest in derivatives to protect the value of the fund, reduce costs and/or generate additional income. Investing in derivatives also carries risks, however. In the case of a ‘short’ position, for example, where the fund aims to profit from falling prices, if the price of the underlying asset rises in value, the fund will lose money.
The fund may invest in fixed-interest securities. These are issued by governments, companies and other entities and pay a fixed level of income or interest. These payments (including repayment of capital) are subject to credit risks. Meanwhile, the market value of these assets will be particularly influenced by movements in interest rates and by changes in interest-rate expectations.
The fund may invest in higher yielding bonds, which may increase the risk to your capital. Investing in these types of assets (which are also known as sub-investment grade bonds) can produce a higher yield but also brings an increased risk of default, which would affect the capital value of your investment. The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities.
Because one of the key objectives of the fund is to provide income, the annual management charge is taken from capital rather than income. This can reduce the potential for capital growth.
The additional expenses of the fund are currently capped at 0.14%. This has the effect of capping the ongoing charge for the class I units issued by the fund at 0.89% and for class R units at 1.64%. Artemis reserves the right to remove the cap without notice.
The historic yield reflects distribution payments declared by the fund over the previous year as a percentage of its mid-market unit/share price. It does not include any preliminary charge. Investors may be subject to tax on the distribution payments that they receive.
Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk), 25 The North Colonnade, Canary Wharf, London, E14 5HS.
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