Andrew Pitts details how the funds and investment trusts in ii’s two income portfolios have been performing.
This August proved to be one of the best on record for risk-friendly investors, as we explained in our review of our three growth-focused Model Portfolios (published on 15 September 2020).
Over the month, compared to the growth models, our two income-focused portfolios made less-exciting returns of 2% to 2.6%. But, this was better than the income benchmark return of 1%.
In contrast, our three growth models returned between 3.5% and 4.4% in August. All three beat the benchmark.
- Find out more about our Model Portfolios and the benchmarks used to compare performance in our methodology
- Check out our guide to our five Model Portfolios
ii Low Cost Income Portfolio disappoints
Standout stat: WisdomTree Global Quality Dividend Growth returned 4.2% in August.
Unlike its growth-focused cousin, the ii Low Cost Income Portfolio has underperformed its benchmark since inception, having lost 1.3% since 1 January 2019 compared with a static return from the income benchmark, which is comprised mainly of global stock market indices focused on dividend yield.
However, over the past month, the portfolio has produced double the 1% return from the benchmark.
The standout performer in August was WisdomTree Global Quality Dividend Growth (LSE:GGRG), an exchange traded fund that tracks a bespoke index developed by the fund provider. It includes companies in global developed markets that are fundamentally weighted by a variety of quality and growth factors and then adjusted by the dividends paid and dividend growth achieved.
It returned 4.2% in August, which compares very favourably against the returns from the two other equity income funds providing exposure to global developed markets: the 1.5% return achieved by the Vanguard FTSE All World High Dividend Yield ETF (LSE:VHYL) and the 2.7% return from SPDR S&P Global Dividend Aristocrats ETF (LSE:UKDV).
So far in 2020 (and over longer periods), the WisdomTree ETF’s focus on quality has also helped it to outperform: it is up 6.2% compared with losses of nearly 10% for the Vanguard fund and 23% for the SPDR ETF to the end of August.
For investors seeking to withdraw income from their investments rather than reinvest it, there is one problem with this fund, because it does not provide a distributing share class. Neither does WisdomTree provide an underlying historic dividend yield for the ETF in its monthly factsheets, so investors who do want to withdraw the income generated from their investments need to estimate what this might be. One way to do this would be to reference the historic yield on the Vanguard ETF, which is currently 3.1%.
Despite the lack of distributable income from the WisdomTree ETF, which is the portfolio’s largest holding with a current weighting of 16.4%, the weighted historic yield remains relatively healthy at 3.4%.
ii Active Income strategy still in the doldrums
Standout stat: BMO Commercial Property returned 17.9% in August, following its return to the dividend register.
In common with all investment strategies that focus predominantly on income from equities, our Active Income Portfolio remains under pressure. Nevertheless, there are some signs of recovery, with the portfolio’s 2.6% return in August beating the 1% return from the income benchmark.
It is also beating the Low-Cost Income Portfolio’s returns since 1 January 2019. However, at just 2.4%, the Active Income Portfolio’s gain (with income reinvested) provides no reasons to break out the bunting. But we have every hope that the portfolio’s high weighting to income-focused investment trusts with decent revenue reserves will ensure that the historic portfolio yield of 4% can be maintained throughout the unprecedented dividend drought that has blighted returns for income investors.
Three trusts with strong revenue reserves are included in the Active Income Portfolio, accounting for around 35% of the total investment. They are Murray International (LSE:MYI) (15.3% weighting; yield 5.6%), Bankers (LSE:BNKR) (10.8% weighting; yield 2.1%) and City of London (LSE:CTY) (9.1% weighting; yield 5.9%).
Of the portfolio’s 10 constituents, the best performer in August was BMO Commercial Property (LSE:BCPT) trust, which has a target weight of 5% in the portfolio. Its 17.9% return followed its early August announcement that dividends would be resumed, albeit at half the previous level, at 0.25p per month. At a current share price of 63p (9 September), that equates to a prospective dividend yield of 4.8%, assuming this current level of dividend is at least maintained.
It is not inconceivable that the trust may also pay a special dividend after its financial year end in December if rent collections remain relatively robust, valuations do not plummet and interest on borrowings do not prove overly onerous, but investors would be wise not to hold their breath waiting for this. The outlook for the UK economy is highly uncertain and, by association, commercial property, which is reflected in the current share price discount to net asset value of 46%. That compares with an average discount of 9% among the 18 constituents of the AIC Property – UK commercial sector.
Elsewhere in the portfolio a decent 4.3% return was generated by two other trusts in August: Bankers and Standard Life Private Equity (LSE:SLPE) trust. The latter distributes 4% of its end-year net asset value as quarterly dividends.
Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.
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