Interactive Investor

How our two income Model Portfolios fared in September 2020

16th October 2020 11:22

Andrew Pitts from interactive investor


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We examine the income funds and trusts best keeping their heads above water in the dividend drought. 

September proved to be another disappointing month for investors focused on income. Our benchmark – made up of a variety of indices that prioritise income (mainly equity dividend-focused) – fell by 0.9% on the month, although this is only marginally worse than the 0% return recorded by the growth benchmark.

That is not the case over the third quarter – income is down -0.3% versus a gain of 1.4% for growth. Over a longer time period, since the portfolios were introduced in January last year, the income-focused benchmark has lost just under 1%, while growth is up 13.1%.

For income (rather than growth) investors, tracking indices via the funds represented in the low-cost income model has so far resulted in less disparity in performance compared with the active income model.

Low-Cost Income gained 0.1% over the month, compared with a loss of 0.8% for Active Income. Since inception, the Active Income Portfolio holds a marginal advantage, returning 1.6%, compared with a -1.2% loss from the Low-Cost Income model.

The historic yield on the active version is also usefully higher. Figures from Morningstar indicate a historic yield of 4% for active income, versus 3.3% for low-cost income.

ii Low-Cost Income Portfolio

Standout stat: SPDR Morningstar Multi-Asset Global Infrastructure gained 2.3% in September.

Globally focused funds have again outperformed moribund UK equity income funds. The two UK equity income-focused choices suffered varying degrees of ill fortune. The better of the two, SPDR S&P UK Dividend Aristocrats (LSE:UKDV), suffered a -1.9% fall over the month – a slightly bigger fall than the FTSE All-Share index – and taking losses for the year to date to -21%.

Both figures are superior to the Vanguard FTSE UK Equity Income fund, which is down -3.7% over the month and a whopping -26% year to date.

The SPDR-managed exchange-traded fund (ETF) has essentially tracked the performance of the FTSE All-Share in the year to date – and actually beaten it on a 12-month view – with the superior performance likely due to its more discerning strategy. It seeks to invest in up to 40 stocks that have held or increased their dividends over the past seven years.

The current distribution yield of the 35 current constituents in the fund is 3.5%, with the portfolio headed by Jupiter Fund Management (LSE:JUP), British American Tobacco (LSE:BATS), Phoenix (LSE:PHNX), Legal & General (LSE:LGEN) and United Utilities (LSE:UU.).

The Vanguard fund has a simpler strategy: it tracks the 119 stocks that make up the FTSE UK Equity Income index, which is an index of higher-yielding shares. The top 10 holdings, which look quite different to the SPDR ETF’s, account for 44.5% of assets. The historic equity yield is a lot higher too, currently quoted at 5.6%.

The best of the three global equity income passive funds was WisdomTree Global Equity Dividend Growth ETF (LSE:GGRG). Its focus on quality companies means it has a lower underlying portfolio yield than our other two global constituents. Indeed, it does not distribute income, so investors wanting to spend income need to take a view as to what level they would want to withdraw from this fund. However, what it lacks in yield, it makes up for in total return.

This recent addition to the portfolio returned 1.75% in September, with its gain in the year to date now 8%.

Meanwhile, the Vanguard FTSE All World High Dividend Yield ETF (LSE:VHYL), which has a current yield of 3.3%, gained 0.2% in September. That is far better than the disappointing show from SPDR S&P Global Dividend Aristocrats ETF (LSE:GBDV), which has failed to emulate the better comparative performance of its UK-focused cousin.

Although it gained 0.9% in September, the SPDR S&P Global Dividend Aristocrats ETF is down 22.2% in the year to date. It is interesting also to note that the historic yield of 4.4% from the ETF’s current 77 holdings is the highest among the three global ETFs.

The performance is doubly disappointing given that the index it tracks, the S&P Global Dividend Aristocrats Quality Income index, paints a reassuring picture of what investors can reasonably expect. The factsheet for the ETF states the index’s aims as: “designed to measure the performance of high-dividend-yielding companies within the S&P Global BMI that have followed a managed-dividends policy of increasing or maintaining dividends for at least 10 consecutive years and simultaneously have positive return on equity and cash flow from operations”.

Elsewhere, the best performance for the portfolio overall came from the 5% allocation to the SPDR Morningstar Multi-Asset Global Infrastructure ETF (LSE:GIN), which returned 2.3% in September. The hedged to sterling share class of Vanguard Global Bond Index fund also made a small positive return of 0.5%, taking its gain in the year to date to 4.7%.

ii Active Income Portfolio

Standout stat: City of London has increased dividends for 54 years and currently yields 5.7%.

Having registered a decent 2.6% return in August, our Active Income Portfolio fared less well in September, losing -0.9%. That takes the loss over the quarter to -0.3% and -11.8% over the past year.

Although of little comfort to followers of the portfolio, this performance betters that of the income benchmark and the low-cost index-tracking model. Over a year, for example, the benchmark is down -12.5%. Since inception in January 2019 the portfolio is up 1.6% but the benchmark is down -0.8%.

The chief detractor to performance in September was BMO Commercial Property (LSE:BCPT) trust, which lost -5.6%, taking some of the gloss off its 17.9% gain in August. However, this trust, which invests in a diversified portfolio of bricks and mortar UK property, has only a 4.7% current weighting in the portfolio.

The other holding that provides exposure to alternative” strategies, Standard Life Private Equity (LSE:SLPE), distributes 3.5% of its net asset value in dividends each year, paid quarterly. Its shares were up 2.4% in September, making it the portfolio’s top performer. The trust’s shares trade on a -31% discount to its last recorded net asset value, compared with an average 20% discount for investment trusts in the private equity sector.

With UK equity income strategies continuing to prove largely disappointing in the dividend drought, the -4.1% loss from Man GLG Income had a larger negative effect on the portfolio, due to its higher weighting, currently 9.6%. The fund’s target weight in the portfolio is 10%, but its current run of poor performance – it is down -27.7% in the year to date – has dragged it down.

City of London (LSE:CTY), the portfolio’s other direct UK holding, has a higher exposure to larger companies than Man GLG Income, and fared a little better in September, down -2.2%. Its losses over the year to date are, unfortunately, similar, with the shares down -26%. The trust’s manager, Job Curtis, has reiterated the trust’s commitment to maintain the trust’s outstanding 54-year record of dividend increases through these difficult times. It currently yields 5.7%.

Utilico Emerging Markets (LSE:UEM), which is invested mainly in infrastructure assets across the emerging markets, also sports a decent, if slightly lower, yield of 4.3%. Like City of London, its annualised dividend growth over the past five years has been 4.4%. It has also reiterated its intention to at least maintain its current level of dividend payments in 2020. The shares are down -24.3% in the year to date.

Despite the economic shock of the pandemic and severely detrimental events such as the collapse in value of the Brazilian real (the trust has had a large exposure to Brazil), our sources have indicated that income in 2021 should be at a similar level to 2020, as many of the trust’s holdings have not cut their dividends, while several have increased them.

Murray International (LSE:MYI) investment trust and Fidelity Global Dividend, the portfolio’s largest holdings, were among the best performers in September, with the former losing just -0.1% and the latter up 0.3%.

Portfolio stalwart Bankers (LSE:BNKR) investment trust, up 3.7% over the year to date, lost a little ground in September, dropping by -1.4%. Morgan Stanley Global Brands Equity Income, introduced to the portfolio in August, fared a little better, up 0.5%.

The portfolio’s fixed interest exposure via Jupiter Strategic Bond had another decent month. Its 0.4% gain added to the 4.4% return in the year to date.


Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.


These articles are provided for information purposes only. The information we provide in respect of the ii Model Portfoliosii Super60 or ACE30 is an opinion provided by ii or one of its partners on whether to buy a specific investment or portfolio. Please note that none of the opinions we provide are a “personal recommendation”, which means that we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. Therefore, you should ensure that any investment decisions you make are suitable for your personal circumstances. If you are unsure about the suitability of a particular investment or think that you need a personal recommendation, you should speak to a suitably qualified financial advisor.

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